Startups are increasingly open to venture funds as well as direct investment from family offices. Family offices, in turn, are increasingly investing strategic capital, adding value based on their operational businesses and network connections.
The average family office venture portfolio includes 17 direct investments and 10 fund investments. Unfortunately, I see many investors investing money in companies with surprisingly little knowledge of their financials or other basic information.
Mike Ryan, CEO, Bullet Point Network, said, “If you are selecting specific companies for direct investment, including co-investments offered by platforms, funds or special purpose vehicles (SPVs), as well as deals directly sourced If you are involved, you need to investigate. Invest yourself either using your own team or an external provider, as you do not have a fund manager to rely on. Painting all early stage VCs with a brush though Unlikely, it is generally true that their superpowers are around sourcing great deals in the early stages and valuing the founders.When it comes to investing in the later rounds at higher valuations once the business is in the scaling mode , then it can be dangerous to commit without doing serious independent work on a company’s outlook compared to the company’s current (usually higher) valuation.
Three primary concerns I recommend checking when making a family office co-investment:
- Often, VC funds are invested in an earlier round, and it benefits from paper markups and reputational gains at the completion of the round;
- Funds sometimes want to commit to a large investment (or fill pro-rata) in order to maintain their position or influence; And
- In an SPV, usually the organizing unit is earning a fee, which means that the organizer is motivated to offer as many SPVs as possible with the widest spread of returns, as they always have the option of upside down on each. .
A popular option is to bring in an outside provider to help with this due diligence. Large strategy consulting firms offering outsourced investment due diligence and analysis as a service have built in critical practices: Tiger Global Management has been cited as Bain’s #1 client globally; Specialized firms such as Accordion Partners offer outsourced transaction modeling and execution; And Bullet Point Networks has an analyst team to hire on a patented software platform. to name just a few.
Ultimately, I look at seven main ways that family offices can responsibly invest in early-stage companies, ranked in order of increasing level of time and effort required:
1. Invest exclusively in VC Funds (or Funds of Funds),
the profit: Professional management and, importantly, Carrie’s net. Virtually every financial advisor will tell you not to invest directly in stocks unless you are a professional stock-picker; Instead invest in funds. If this is true in liquid, transparent public markets, it is even more important in illiquid, opaque private markets.
Harm: You pay a management fee and get carried away. You need to do proper due diligence on the money. You do not have the discretion to make decisions on a per-company level. Also, small retail investors usually cannot invest in the fund because their checks are too small. However, several platforms now facilitate direct access to VC funds, such as Allocation, CAIS, Clad, Context 365, iCapital Network, Our Crowd, Palico, PrimeAlpha, Republic and Trusted Insight.
2. Invest in companies through syndicates and online investment platforms. (eg AngelList, Republic or Republic Capital,,
the profit: These established platforms provide stable, pre-computed, often high-profile deal flows with standardized levels of details and disclosures. You have complete control to choose whether or not to participate in a specific investment, usually through an SPV. The platform decides on behalf of the SPV when to liquidate the investment and distribute the profit (or loss). This level of control enables you to invest money only in investments where you have the highest confidence and alternatively think you can add the most value.
HarmPlatforms: Platforms generally charge carry and management fees. The carry is calculated on each investment – not the entire portfolio – even if you invest in multiple SPVs. For example, if you invest equally in 10 companies and 9 fail, but there is a 10x winner, you will pay materially more fees on the winner than if you invested through the fund structure. Is.
3. Invest in funds and let them know that you are valuing them based on the number of direct opportunities they offer,
the profit: There is no additional cost on your direct investment, except that the fund charges a fee on the SPV. If you are a physical LP and are actively involved with the fund, this approach will give you a lot of insight with your own employees, without the difficulty of building an in-house VC operation comparable in sophistication. and gives effect. Competitor.
Harm: You will still face the challenge of getting a syndication request and responding positively before other people invest in you, as companies that have achieved a reputable LEED VC tend to overestimate their syndicates. Fill up quickly.
4. Invest in the general partnership of a fund.
the profitPotential long-term upside from the success of the general partner, not just from a particular fund. A related, simpler option is to extend a working capital loan to a GP, wherein several, pre-agreed, are secured against their future carry.
Harm: Far more complicated to negotiate.
The last three options require a dedicated individual or team setup, as you will be competing primarily with institutional players who typically follow each of the strategies below. Furthermore, many family offices find it difficult to execute these strategies without giving up some of their traditional, deliberate ambiguity. It is difficult to market your firm without a website and other traditional marketing tools.
5. Actively seek co-investment opportunities led by reputed VCs.
the profit: No management fee or carry. In general, this is by far the most crowded strategy. The reason is simple: Historically the best performing VCs consistently outperform, a certain level that is not present in most other asset classes. When you can invest with these top funds, you will probably outperform.
HarmAdverse selection is a real issue. When VCs are most confident in investing, they will write a large check and invite only their closest associates to the round. Joining the Syndicate is a Tough Strategy to Execute Well Without Suffering the “Winner’s Curse”,“Because the VC industry has so many followers and so few value-setters.
6. Promote that you are focused and value-added in a specific industry,
the profit: This is the standard approach used by professional VCs who are not major investors. You’re going to receive more frequent inbound, high-quality requests with this focused origination approach. Note, the bar is high for companies to truly add value; Just giving general advice is not enough.
Harm: You really have to keep your promises.
7. Lead Round.
the profitLeading investors get the best deal flow, as they are the engine of our entire ecosystem. “If VCs are struggling to get in on the best deals, family offices that aren’t acting like professional VCs will simply be dismissed,” a veteran family office CIO told me.
Harm: You are competing with institutional VCs, so you will need to dedicate comparable resources and manpower. Only a small number of family offices have an asset base to justify doing so.
David Tetten is the founder of multifaceted venture capital, which invests in capital-efficient startups. he writes from time to time teten.com And @dteten,
