So what does it mean to bring on an individual or family investor in lieu of going the traditional VC route?
The first thing to understand is that it’s not a growth equity fund — the primary goal of a family office is to invest wealth prudently and extend it beyond generations.
Businesses work with SFOs and MFOs because of the multi-disciplinary approach that ensures their wealth transfers across multiple generations in the most tax efficient manner possible, that their children and future generations have prudent investment programs implemented and that they have the appropriate infrastructure and fiduciaries installed to responsibly manage and maintain wealth.
This gives family offices tremendous flexibility in the types of companies and industries that they choose for investment. These offices are typically not beholden to a set of mandates forcing investment into a predetermined space and criteria.
The Family Office investment process includes much more than writing a check. It’s about finding the right types of investments and management teams that are going to deliver long-term mission-driven value.
Sure, everyone wants to find and fund the next unicorn, but because of the family commitments, offices of this nature are not going to do this through an indiscriminate “spray & pray” approach. Family offices are more focused on finding the 'right' opportunity and do not have a clock ticking in terms of putting funds to work like a venture fund may have.
Family office decisions are based squarely on investment fundamentals. These dynamics change the investor/startup relationship, because it’s not just about a quick exit. The family office isn’t running a fund with multiple investors to answer to, so they can afford to sit on the investment and help it grow. The same external pressures exerted by institutional investors to wind down investments or get out at inopportune times don’t exist.
This significantly lessens the influence to artificially maintain high watermarks to receive incentive allocations. Family office decisions are based squarely on investment fundamentals, where long-term value creation replaces the 2/20 mentality.
As a result, investments are more than fungible capital. It’s a commitment to align with the entrepreneur on a much deeper level. The deep, global networks of the ultra-wealthy families are used to create opportunities for the young businesses — from providing strategic advice, intelligence and subject matter expertise, to tangible benefits like identifying contract manufacturers to assist with the development of hardware products.
Finding a family investor
So as a business looking for family investment, how do you find these alternative sources of funding that offer such collateral benefits?
The first and best thing you can do is look to your board and the connective network you already have. The ability to access family office networks is something to consider when building your board and team of advisors. If your existing network has been exhausted, there are new generation platforms like The Private Investment Group or small family events and other opportunities that can bring you closer together with angel investors and family offices.
The nature of the family office induces secrecy (many don’t even have a website), which makes it nearly impossible to blast off unsolicited pitches. So it really does come down to networking. But in the end, being able to break through and figure out a way to connect with the right family office can act as a natural selection process and indicate the hallmark of a good entrepreneur and good deal.
Another great place to start is identifying other entrepreneurs who have been successful in your specific space and may currently have a family office or more formal startup investment program. Most often, your ideas will resonate with these folks first and best.
There’s no doubt that the slowdown in venture investment is impacting companies across industries. But entrepreneurs who open their eyes to non-traditional sources of capital and are willing to put in the legwork to identify them may find an enduring friend in the family.