Over the past decade, family offices have become increasingly interested in the realm of direct investments and coinvesting. According to an August report by Fintrx, two-thirds of family offices created since 2015 are now investing directly where they typically engaged managers before.

This trend has led family offices to gather specified asset pools and the talent required to allocate capital directly into private markets. Today, nearly every family office has decision-makers with firsthand experience in successfully operating businesses.

To an extent, this makes sense. Direct investments can be a fantastic return-enhancer when deployed in the rare companies that end up being massively successful, and extra transparency and control are undeniably appealing. That said, there are significant complications that come with these family office investment tactics that are worth considering.

When Direct Investing Becomes Difficult

First, making successful direct investments could be hard to achieve.

According to premier venture investor Marc Andreessen, if a top-tier VC firm invests in 200 companies, only 15 of those will reach $100 million in revenue. And entrepreneur and VC Mark Suster reiterates: “You make 20 investments in a fund. One is going to return the entire fund. Two more are going to return it again. A few more are going to have strong outcomes and return it again. The rest are noise when it comes to fund returns.”

Successful direct investment requires specialization that stretches far beyond knowing how to operate a business. Only those with an encyclopedic knowledge of industry trends and existing startup efforts can identify which opportunities are unique amongst tens of thousands of early-stage startups. This is just one of the reasons why investing in venture capital managers continues to be a stable option.

Second, direct investment requires a significant amount of additional hands-on engagement to ensure success. Successful early-stage investors provide introductions to potential customers, open communication lines to new investors, and recommend key hires that can help their portfolio companies grow. Without encyclopedic startup knowledge and a capacity for enhanced engagement, investing directly simply becomes guesswork.

Third, it’s nearly impossible to gain access to investment rounds in startups that are on a path to unicorn status. Access to opportunities is limited, which means that even if a family office manages to identify a startup with high growth potential, it is likely flush with funding. By the time a successful startup announces a new funding round, it’s usually already filled. However, VCs that invested in prior rounds are generally offered the first opportunity to fill subsequent rounds. To access these opportunities, the singular option could be to work with VC managers to reserve a portion of the round for a direct investment, thereby granting rarified access.

Ensuring Success in a Transformed Investment Landscape

All of the above is why investing in venture capital funds — along with working closely with venture capital managers who are skilled at identifying promising startups — continues to be a necessity for family offices. By aligning with successful funds that share similar industry appetites (e.g., data-driven tech), family offices can follow these managers’ leads, investing directly alongside the fund in the companies that demonstrate promising metrics.

This is a winning strategy that not only reduces the size of the investment pool of companies to consider, but also increases the allocation to successful companies in the shared portfolio. This saves family offices valuable time, all while enhancing returns by concentrating investment in successful outcomes. 

Family offices following the lead of those with in-depth knowledge and preexisting investments in unicorn-status startups can ensure outsize returns for their clients. This is why Ascend specializes in helping people navigate these investments, specifically in the world of deep tech. We’re experts in navigating the data-centric companies and sectors that are revolutionizing the economy. Learn more about savvy tech investments by signing up for our newsletter, or schedule a 30-minute meeting to meet with our general partner and discuss investing directly alongside our flagship venture capital funds.

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