Family offices investing in venture capital is an increasingly common phenomenon.
91%, 86%, and 76% of family offices in APAC the Americas, and EMEA regions invest in venture capital.
While the rate of growth has slowed and portfolio allocations unchanged or slightly reduced, VC remains a popular channel through which to invest, and it still might very well be a “golden age” for venture capital investing.
Sam Weatherford, founder of private investment firm Weatherford Capital, shares a similar view:
“This is going to be the best time in the next 15, maybe 20 years to be deploying capital.”
Alternative investments in general have been attractive to single- and multi-family offices, as they offer the possibility of greater reward and appear more enticing than the limited returns in the public markets as of late.
While the rewards are there, family offices must consider all aspects before placing their bets.
When investing in a new business that has yet to win customers and create profits, pack your patience.
Depending on the company and industry you’re investing in, new ideas take time to bring to market. The product and messaging must constantly be refined, and the public needs to be educated and warmed up to the offering.
It could take up to 10 years to see meaningful returns, and according to TechCrunch, it could take 12-14 years to fully liquidate returns.
In short, family offices should keep expectations in check.
Venture capital investing is high-risk, high-reward.
According Harvard Business School senior lecturer Shikhar Ghosh, 75% of venture-backed companies fail.
This isn’t meant to dissuade or discourage anyone from investing in the asset class. After all, the returns of a few good ones can offset the losses of the rest.
With this in mind, be fully aware of the risks, then allocate portfolios and exposure appropriately.
The success of VC investing is only as good as one’s networks.
Just like investing in a new company, building connections takes time. Finding others who invest well, have advice to share, as well as opportunities they can introduce one to, these experiences can only come by going out and meeting others.
Attending family office conferences is one of the best ways to meet like-minded families.
At these conferences, one not only meets other wealthy families, but also professional investment managers, consultants, software and service providers. There, they’ll hear how others manage their investments and discuss new opportunities.
Most wealthy families are private in their dealings with little or no publicity online. As a result, finding them is hard, but by going to events that host them, that is a good place to start.
Here is a list of upcoming events for family offices.
Direct investing is not for everyone, at least not for the inexperienced.
74% of single family offices make direct investments, but most are not “sophisticated” enough to handle them.
And in recent months, family offices have slowed their direct investing or stopped it entirely with the intention of handing that responsibility over to asset managers.
Ronald Diamond, founder of Diamond Wealth, shared his take on the challenges of direct investing:
“People are learning and they’re going to learn the hard way.”
As we mentioned earlier, direct investing is not for everyone.
Instead, family offices can either hire in-house investment professionals to manage the direct investments, or they can partner with venture capital firms who specialize in identifying the opportunities and managing the funds.
Family offices investing in venture capital should consider working with other investment professionals and fund managers, bypassing the risk and stress associated with directly managing the investments.
Managing the investments is one thing, the investment statements and reporting are another.
When family offices invest in venture capital, they receive statements and have to process them in a timely manner.
It’s a manual task, and statements can come in at irregular times. Someone has to be available to process them, but it’s not worth time or .
The downloading, storing, renaming files, extract PDF data into Excel… the time adds up.
Family offices should automate those steps, among other data and reporting requirements, and Empaxis can help.
Indeed, there is opportunity for family offices investing in venture capital, but there are many things they should know about first.
Thinking long term, recognizing risk, building networks, partnering with investment professionals, and automating tasks are some of the points to consider when dealing venture capital.
With the right plan and the right partners, family offices will do well investing in this alternative asset class.