Over the past 15 years, the number of family offices worldwide has more than doubled to reach a total of 10,000 (Bloomberg LP, 2017). Numerous factors drove this historic rise, from newly minted billionaires to increasing efficiency within the wealth management space. Overall, family offices now manage more than $5T of assets worldwide (UBS & PWC, 2017). Growing ventures seeking capital should view this trend through the lens of partnership.
Family Offices 101
Family offices serve as private wealth management firms for ultra-high net worth individuals (i.e. individuals with over $30M in net worth). First pioneered by John D. Rockefeller in the early 1800s, family offices originally operated through exclusivity; each office existed to serve a single person or family’s wealth. In more recent decades, we’ve seen the rise of multi-family offices that pool resources for anywhere from 2 to 2,000 different individuals or families (Bloomberg LP, 2016).
Most family offices set aside a portion of their portfolio for venture capital and private equity. Traditionally, this takes the form of investing in funds, offloading the responsibility of due-diligence and deal flow to fund administrators. But in the past decade, the increasing sophistication and growth of family offices has doubled direct equity investments and reduced fund participation (Crunchbase, 2018). Now, over 11% of family office holdings are placed into direct equity holdings (UBS & Campden Wealth, 2016). Numerous ventures have found great success in courting a family office directly for capital, especially if it’s a good match.
Matchmaking Your Operation
Before you email your opportunity to every family office you can find, you must understand that a wide variety of investment philosophies exist between them. Primarily, each office falls across a spectrum of growth versus a preservation philosophy. Family offices focused on preserving wealth for future generations might be comfortable trading lower multiples for a higher focus on dividends if the underlying investment appears less volatile. Family offices more focused on growing wealth might think more like a VC firm by seeking out high growth, high multiple-potential startups.
Both growth and preservation offices generally prove excellent long-term capital partners. The time horizon for a VC fund is typically around 8 years, whereas the time horizons for a family office is often generational. Even growth-oriented offices unlikely share the same “move fast and break things” mantra that VC firms stand by. This more considerate approach may yield advantages to some ventures and disadvantages to others. Consider your stage, traction, risk profile, and projected returns before approaching any office.
When dealing with single-family offices, understand that their wealth likely came from success in a single industry. And while it might seem like the most straightforward thing to do, you should not necessarily seek out family offices who service individuals who succeeded within your own industry.
For example, high net-worth individuals who generated their wealth in SaaS often enlist a family office to diversify their assets beyond SaaS. Unlike many VC/PE firms, family offices do not focus on a single vertical or business model. If anything, family offices often feel overexposed within the industry they found most financial success. Consider searching for a family office with enough exposure to your industry to understand your needs, but not so specialized that you fail to add portfolio value through diversification.
Finally, consider timing. At any given point, an average of only 2% of a family office’s portfolio exists as cash (UBS/Campden Wealth, 2016). If you pitch to a family office where almost all assets are already invested, this slows down your process. In order to invest in your company, the family office would likely need to sell off assets. Instead, consider pitching to family offices who service individuals of newly-minted fortune. These offices typically deploy capital much more promptly.. You could also seek out family office portfolios that experienced a recent liquidity event; they will likely aim to rebalance their assets toward the preferred 2% cash position.
Getting in Touch
Unlike VCs, PE firms, and banks, family offices tend to be private, making the discovery process much for challenging for interested ventures. Consider Willett Advisors: the family office who manages the wealth of Micheal Bloomberg. Their website contains merely 36 words and provides no names or emails to contact. Getting in touch with family offices requires more extensive efforts in networking.
Unless you already have many well-connected, wealthy friends, you will likely need to reach a few connections out before you get in touch with a family office. To start, reach out to any attorneys you know. Many attorneys are connected with or already service family offices and ultra-high net-worth individuals, especially in the case of corporate attorneys. Family offices also tend to have preferred banks and accounting firms — use any warm connections here to connect with their wealthy clients.
For a more streamlined connection approach, enlist in a venture finance firm like Venture First. We are connected to a multitude of family offices and deeply understand their individual investment philosophies, which allows us to closely matchmake with growing ventures.
Once you have connected with and pitched to a family office, be mindful that their generational mindset might play out in due diligence and deal timeframes. The speed you often see with VCs and Angels may not be matched by a family office’s team. If your capital needs are pressing, you might need to adjust your raise timeframe or select a different partner for now.
Overall, family offices can serve as a valuable partner for a growing venture. It’s up to you and your team to determine when and who is the right fit for your capital needs.