The family offices of old – set up to manage the towering profits of famous American families such as the Rockefellers in the 19th century – have given way to a new approach to wealth management. Driven by a boom in innovation and entrepreneurship, the number of family offices has increased dramatically since the 1980s, spiking in the past decade.
There is a notable difference in modern-day family offices. First generation family offices tend to look inwards for investment inspiration, often focusing on sectors they already know a great deal about. However, as these offices mature, and particularly as first generation moves to second generation, family offices have increasingly begun to diversify and balance their portfolio while taking notice of venture capital (VC) with its meteoric rise.
Investing alongside VC firms can offer these family offices an efficient and effective way of investing money in start-ups they feel passionate about. Venture capital is associated with greater uncertainty, but as technology companies continue to disrupt all industries, , the importance of investing in tech companies has grown. There is a rather unchallengeable certainty that next-generation technology companies are able to dramatically disrupt many business-models, enabling businesses to do things, faster, more efficiently, with more transparency.
Partnering with VC firms for venture investments offers high-net worth individuals (HNWIs) several benefits – the ability to invest in less capital-rich private companies, take small bets on a wider range of companies to diversify risk and streamline the due diligence process. This is especially achievable when they can join forces with a General Partner with relevant domain experience.
The influence of VC on family market investments has grown in recent years. In 2018 according to research commissioned from Dealroom by Talis Capital, a UK multi-family office and investor, $5 billion out of a total VC investment in Europe in 2018 of $34 billion was contributed by the private wealth sector, principally family offices and business angels.
From 2013 to 2018 the number of private wealth investors committing directly to early-stage technology companies grew 5-fold to $5bn. Two-thirds of family offices created post-2015 now invest directly into private companies, compared with just over 50% of those founded between 2006 and 2010, and 61% of those direct investments are made into technology companies.
This all points to a clear trend: modern, successful entrepreneurs (often operating in the tech space) continue to back themselves when investing their assets. 82.5% of modern family offices that made their wealth in technology businesses go on to invest in the sector. On the other hand, more established family offices created between the 1980s and 2010s, which may be less familiar with the tech sector, have tended to look externally. For a family office looking to manage venture capital investment entirely in-house, a plethora of skills is required – many of which may prove challenging and/or expensive to develop internally.
Given the pace of change in the technology sector, domain expertise presents a significant advantage to evaluate faster and more deeply, as well as to add more value to the company post-investment. Similarly, ventures are increasingly prioritising value-add investors as investment rounds become more competitive.
There are several benefits to partnering with a VC firm when considering direct investments, not least the ability to outsource the often-tricky due diligence process. Moreover, for family offices, this approach provides access to leading companies with difficult to access cap tables and a diversification of risk by gaining access to investment opportunities in multiple sectors. It also allows family offices the ability to leverage the resources and expertise of experienced venture capital firms who add meaningful value to their portfolio companies in a plethora of ways ranging from optimising business operations to negotiating partnerships.
The current landscape is complex. COVID has introduced new challenges into almost every industry, forcing many companies to fold under the pressure, whilst simultaneously being the catalyst for new ventures to solve new problems. Investment rounds are increasing in size and frequency, and competition to be a part of early rounds in promising companies is fierce. Experienced VCs are well versed in navigating the nuances and can negotiate favourable deals for all involved. As family offices look to scale their technology investments, VCs can provide a fantastic opportunity to get exposure to deals, understand some unique challenges and offerings, and explore a wide range of cutting-edge industries with a modicum more security.