This blog is for those tech startups who are keen to know about the concept of Family office investment. So, we’ve rounded up top three reasons why you need to consider direct investments by family offices.
Where there is money, there is wealth. In all likelihood, money is what the most of us have or don’t have. But, it is what we use to buy apparels, house, pay rent or put down a money to start a new business or we can say a startup. Meanwhile, there is a term “funding” that is directly related to the money, and everyone must be familiar with it.
When the right fit for raising funds, then the family offices can be the best possible place for the startups and entrepreneurs to get the direct capital. Family Office is an alternative to Venture Capital.
There are several companies currently raising rounds of venture investment, which are inevitably learning some hard truths. Initially, VC dollars are not as readily available as they were in the previous times, and for the companies, which are receiving funding, are finding that the terms are becoming increasingly less pleasant. However, the good news for the startups who are looking for funding is that a new pathway for direct investment is emerging. So, let’s understand the concept of “Family Office”.
What is Family Office?
Family offices are a wealth management concept wherein ultra-high net worth individuals or families pool their liquid wealth with the express aim of preserving and growing.
In other terms, we can say that Family office is a private wealth management advisory firm, which is established by an Ultra-HNWI (HNWI: High-net-worth Individuals) in order to manage family’s private wealth. In actual, a family office goes beyond just managing wealth. It also helps to secure a family’s financial future by building, preserving, and transferring family wealth and legacy.
Half of Americans hold no stocks, bonds, or real estate, and most of the remaining half that are lucky enough to do so to choose to manage their assets on their own or with the help of a financial advisor. But, when you as a startup moves further along with the privileges end of socio-economic curve, managing, preserving, and growing one’s wealth becomes more complicated.
The world’s highest-net worth (HNW) families employ an entire office full of accountants, lawyers, and investment professionals to manage their assets. These family offices manage the assets of more than one family, but they are still comparatively close-knit. If we’re talking about early days of family offices, they haven’t made many direct investments into individual tech startups rather than favoring a more diversified approach to tech investing by being limited partners in venture capital and other private market funds.
Types of Family Offices
Family Offices are broadly classified into two parts:
1. Single-family Office (SFO)
2. Multi-family Office (MFO)
1. SFO (Single-Family Office): SFO is an organization, which is created to support the financial needs of a specific family group. Generally, a single-family office becomes affordable for clients with at least $100 million or more of investable assets. The examples of billionaires who created single-family offices to manage their wealth include John D. Rockefeller (the first American billionaire), George Soros, and more recently Oprah Winfrey.
2. Multi-Family Office (MFO): MFO is an organization that provides family office services to more than one family group. It also provides a similar range of customized services by the single-family office, but without the need to set up an individual family office infrastructure. The service provided by MFO becomes affordable for Ultra-HNWI1s with the wealth of about $50 million or even more. The examples of multi-family offices include Rockefeller & Co. in 1882, and Bessemer Trust, and Wells Fargo Family Wealth.
To sum up, we can say
- The Family Office is a wealth management company that invests assets on behalf of wealthy individuals or groups of wealthy individuals.
Single Family Offices (SFO): It focuses on managing the wealth of a single individual or family.
Multi-family Offices (MFO): It manages the wealth of multiple families who pool their investable capital together for a more formal or institutional investment arrangement and to reap cost economics of scale.
How Family Office Investment is Different from VC (Venture Capital)
- Venture capitalists raise funds with a 10 to 12 year lifecycle and focus exclusively on building a diversified portfolio of multiple early-stage companies.
- On the other hand, family offices have “evergreen” capital or loan. And, Family offices do not have an investment horizon.
- Venture Capitalists compete for deals through PR (Press Release), Marketing, Fund Sizes, and News about portfolio companies whilst family offices value discretion and confidentiality irrespective of how active they are in their investments.
Family Office Investment is Right for Startup only if –
- You need a relatively large quantum of growth equity or debt. And you prefer the patient variety, complete with investors who will be in it for the long haul.
- To build a halo effect in order to attract talent that is not a requisite for your business model.
- You are specifically seeking a strong entrepreneurial orientation in DNA or background, or specific expertise and advice alongside patient capital.
How Can You as a Startup Company Prepare Yourself to Get Direct Investments From Family Offices
- To create or fine-tuning your pitch, including your financial business model, projections, it is important to position your venture to specifically speak the value points to family offices.
- You need to access a deep network of relevant family offices by industry who already has a track record of cutting checks.
Top 10 Family Investment Offices With The Most VC Deals
In the below image, you can see the names of top 10 Family Investment Offices that ranked by the total venture deal volume.
Increasingly, family offices are investing more into individual tech startups, according to the report by Crunchbase News. Let’s look at the top reasons why tech startups need to consider direct investments by family offices.
Top 3 Reasons Why Startups Need to Consider Direct Investments by Family Offices
1. The Direct Investment of Family Offices Has Picked Up The Pace
The above image is based on over 1700 venture deals (i.e. Seed, Angel, Equity, Crowdfunding, Series A, Series B, etc.) struck with individual technology companies by 193 family offices located around the world.
The 193 family offices with listed venture investments are only a fraction of total count of such groups that tend to be private. However, it is combined with the fact that many startups are slow to announce funding, and it is not like the list of funding rounds of their participants is comprehensive. It is safe to consider above figure as a directional indicator of general trends.
Now, the question is what are those trends?
Firstly, when it comes to the deal volume, family offices’ startup investment activity tracks with the broader venture investment marketplace as it includes individual Angels, Venture Capital groups, Seed funds, Accelerators and others.
In the above graph, you can see the growth of 2015, there was a run-up in the number of deals being struck. After reaching high point, the deal volume began to decline in the United States. According to the report from Crunchbase News, as investors favored denied writing many smaller checks to early-stage startups and rather favored fewer, larger checks with later-stage tech companies.
Bottom Line: On a global scale, the projected deal volume is roughly flat on annualized basis from 2015 to 2017, whereas reported deal data is down primarily because of reporting delays. This is due to the fact that there are more U.S. family investment offices that invest in the startups than international ones. And, it is not surprising to see that the family office deal volume cuts closer to the U.S. market, in general.
2. Family Office Venture Deal Volume Growth Outpaced
There were more deals struck by both types of investor in the year 2017 than in the year 2010 around the globe. But the main difference between these two types of investors (i.e. Family Investment Offices and Venture Capital firms) is – the magnitude of the change.
In the image-given below, we compare the reported deal volume between VC funds and family offices. VC funds have a lot of known deals per year. On the other hand, family offices have much fewer recorded startup investment deals volume against 2010 levels. In doing so, we are able to deliver a relativistic comparison between Family Office investment and VC funds.
Around the globe, in the year of 2015, the reported deal volume from VC firms was almost precisely 2.5 times that of 2010’s totals. Nevertheless, that multiple for family offices is roughly 6 times (6x). And, although, it is not pictured above, the volume growth of family office deal outperformed traditional VC (Venture Capital) between 2011 to 2017, 2012 to 2017, and 2013 to 2017.
However, the above data reflects that the family offices making direct investments into startups, which has been recently becoming a trend. Specifically for that period through 2014, family offices were on the early side of the adoption curve for making direct startup investments.
Bottom Line: In relative terms, around a range of measures, the deal volume growth was higher and faster among family offices than VC funds for a significant period of time.
3. The Long-Term Nature of Family Offices’ Capital
Family Offices have private equity capital to be preserved across generations, unlike venture capital firms that have contractually shorter time horizons. There are biggest differences between Family offices and Venture Capital
- The Family Offices do not have the external capital that raises demands nor are they unnecessarily looking to force exists. As funds approach, their maturity dates, GPs are often under pressure to liquidate investments to either obtain IRR milestones to receive carried interest or to avoid claw-backs.
- In actual, Family offices exist to protect, grow, and transfer wealth across generations. The deals are structured to focus on delivering long-term value and quite often with a uniquely designed mechanism for achieving downside protection. It all depends on the investment. The family office may look for an exit in 1 year, 15 years, or never, and all of which are dependent on the nature of the deal.
- Family Offices have the patient capital to allow companies to develop and ferment. However, whatever growth you see on the VC side, it is the product of growth in the market in general. But, this is not like that the Venture Capital funds that are still adopting direct startup investments into their collection.
All we can say that as compared to Venture Capital, Family office investment is still the very new thing in the marketplace, no matter how family investment office old is.
According to the above points that Family Offices are growing as participants in the direct deals are also growing. We believe that in this competitive world, Family Offices investments are compelling alternative to funds. However, the concept of family investment offices is capable of drive better returns in aggregate in asset class. However, in order to achieve such returns, it needs sufficient preparation on the side of the family office, and an informed evaluation from the side of the entrepreneur.
Bottom Line: Family Offices represent a deep but largely untapped well of venture funding for both tech startups and the later-stage entrepreneurs who have taken enough time to understand the niche’s workings. Family Offices embrace different investment styles, organizational structures, and track records, but Family Offices represent some of the most patient, long-term supportive sources of capital in today’s market.
A Concluding Note
It should go without saying that investing in startups is not for every high net worth individual or family. But as long as tech startups are concerned, they continue to attract younger generations who will eventually take up the task of using a fortune. You don’t need to be surprised if many of them look to the investment groups highlighted for some inspiration.
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This page was last edited on May 22nd, 2020, at 1:29.