The practice of investing is changing. Traditional modes of thinking are being joined by new modes. The persona of those who invest is also shifting — new demographics are entering the world of investing, and the face of venture capital looks very different today from how it looked even a year ago.
Family offices are aboard this tide of change. Many family offices are considering venture capital for the first time, exploring how to invest in venture capital for the good of their portfolios and increasingly considering direct investments. For this reason, it behooves VCs to spend more time thinking clearly about how partnering with family offices can help enable and expand the industry.
What opportunities does VC bring to the family office?
Why are family offices venturing into VC territory? The simple answer is that deciding to invest in venture capital is good for the family balance book. According to a survey conducted with 118 representatives of ultra-high-net-worth families, the average return on VC investments was 14%, and 61% of family offices believe their highest returns in the next 10 years will be generated by emerging managers.
So, family offices are seeing VC allocations pay off, but how exactly are they leveraging these in their portfolios? What is venture capital offering them that they’re not getting elsewhere?
Well, according to the same research, 76% of high-net-worth family offices invested directly in companies, 26% preferred to source their own opportunities, and an overwhelming majority (92%) preferred to co-invest — or to work with other family offices and venture funds to boost their likelihood of success. Early-stage ventures were also exceedingly popular, with 91% engaging in Seed or Series A rounds, which deliver advantaged pricing and strong returns.
The survey data was collected in pre-pandemic America (between late 2019 and early 2020), but a follow-up survey sent to respondents in the wake of the pandemic showed that family offices were not shaken from their belief in VC’s power to boost their net worth. In fact, 63% planned to maintain or increase their allocations to VC even after the widespread effects of COVID-19 had become known.
Moreover, VC relationships are reciprocal. Family offices bring trust and a sense of “patient capital” to VC funds, while high-net-worth families invest in venture capital to magnify their impact.
How to set up a VC-family partnership with strong foundations
What does a thriving family office and VC partnership look like? Given the magnitude of the advantage on offer, it’s important to contemplate expectations in advance. The following are just a few of the tenets to consider:
1. Adding diligence to decisions.
Venture capital experience can add rationale to family office decision-making with industry-specific diligence and stage-appropriate, formal processes. VCs see so much of the early-stage landscape each and every day that they are able to give family offices preapproved, vetted, credible, and exciting opportunities. The right VCs will help families achieve the kind of due diligence often taken for granted in their industry.
2. Diversifying to spread risk.
Venture capital is an asset class with an inherently high level of risk. Experienced venture capitalists spread and mitigate that risk by choosing diverse sets of investments with different return potentials and timelines. They know that losses are inevitable and that diversification can balance them with outsize returns elsewhere. Moreover, compared to the heightened risk of investing directly in early-stage tech companies, investing via a venture capital fund defends against individual exposures with dispersion among a wide variety of investments.
3. Engaging with newer generations.
Family offices are unique in that they bring multiple generations together for a singular need. Those different generations all have stakes in investment returns, only on different time scales. Younger generations, having seen numerous tech companies rise to ubiquity, might be especially interested in learning how to invest in VC. It will be particularly important that venture capital engages with these future investors — they may well have specific insights that will power future impacts, such as ESG investments.
More and more family offices are learning how to invest in venture capital and are bringing their own experiences and interests to bear on this industry. Investing is evolving, with new generations bringing new values and desires; if venture capital is open and listens to these new participants, it may well learn something.