Since about half a decade ago, family offices have started behaving like venture capitalists. Many of them have increased their allocations towards venture capital to capture potential opportunities and deals at early stages. They have also developed in-house capabilities that allow them to successfully and directly invest in new businesses.
Many pink paper reports talk about family offices investing in startups, but that doesn’t necessarily mean their approach to venture investments is structured. Venture capital investing for family offices is not their largest asset class exposure, but they spend a significant amount of time discussing it in formal and social setups.
Silicon Valley Bank and family office advisor Campden Wealth conducted a global survey of family offices recently. They found that almost 75% of family offices have said they directly invest in startups, while the remaining 25% source deals themselves. In other words, the more significant portion of money family offices invest goes directly towards startups instead of into VC funds.
Consequently, family offices are gaining credibility as sophisticated and reliable components within the venture capital ecosystem that exists today to add value to venture funds and startup enterprises strategically. They are improving their methods and outcomes when it comes to due diligence and identifying the right mix of team, business ideas, and product-market fit for a greater chance of success. They also offer strategic connections and networking with the operating family business or other investors they know.
The ‘Family Offices Investing in Venture Capital: Global Trends and Insights 2020′ survey was carried out from October 2019 to February 2020, with additional checks for the impact of Covid-19 on VC investment. According to this survey, 10% of all respondents’ portfolios were made up of venture investments. There has been a 6x increase in the direct venture deals in which families have been involved since the last decade.
Some other findings relating to family offices investing in startups are as follows:
- 80% of family offices reported putting money into venture funds, providing an efficient channel for outsourcing the flow of deals and due diligence. However, the money allotted to direct startup investments is greater (54% of the total) than that allotted to VC funds (46% of the total).
- Family offices showed a 14% average internal return rate from their venture portfolio 12 months immediately before the survey, which was higher than their returns from real estate, public equities, and other asset classes. Over 85% of respondents reported that their returns from VC met, if not exceeded, their expectations.
- Family offices have made a significant impact in the VC industry, but accessibility is still a challenge. About 67% of family offices believe emerging managers will source the next decade’s highest returns. But access to compelling managers is a massive barrier to VC investing today.
The role of family offices will be necessary for developing entrepreneurial talent across the world. However, the added responsibility is to ensure that this role is beneficial for both the startup ecosystem and the family office. Using an unstructured approach could make family offices lose sight of their real goals and get diverted towards meaningless problems.