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Understanding the family office perspective on venture fund investing
Having covered the emerging venture landscape for nearly a decade now (stay tuned for our updated Micro-VC database, which we will release next week), it’s abundantly clear that family office capital remains the dominant capital source for emerging venture funds — in our last survey of over 100 first time venture funds, an average of 67% of capital closed came from family offices (the exceptions are spin-out managers, which often attract institutional LP capital at Fund 1).
The challenge many managers have with acquiring family office capital is the opaque nature of the network, from the fundamental aspect of finding family offices that are actively allocating to venture to deciphering the decidedly bespoke decision making processes.
To help, we launched a family office initiative earlier this year designed to serve as an educational and connective agent for family offices that are interested in deepening their efforts in venture. Over discussions with nearly 75 unique family offices, and summits held in Denver and recently in New York (in concert with Kauffman Fellows), we’ve gathered and synthesized perspectives .
As an aside, if you are a family office that has or will have a venture fund or direct allocation strategy and are interested in getting access to our data reports and family office centered programming, please send me or Hana Yang a note at firstname.lastname@example.org and email@example.com respectively to get added to our distribution list.
In bullet point form, here’s what we’ve observed in recent discussions:
- Average allocation to private strategies typically range in 10–20% range with 33% to 50% generally reserved for venture fund and direct investing. Family offices whose wealth came outside of the tech sector, and/or those not located in Silicon Valley, the core initial focus has universally been that of fund investing with allocation sizes ranging commonly in the $2MM-$5MM range.
- Decision making is markedly different across family offices, and we did not see a consistent theme to decision making other than we found that family member principals are typically very involved on private investing, even with family offices of scale ($1B+); this may not always be transparent to a venture fund manager, but it was clear that having a family member relationship considerably accelerates allocation probability and speed (one CIO told me that a strong family member recommendation rarely will get rejected unless it poses some type of significant financial or reputational risk).
- The majority of the family offices we spoke to voiced higher interest in investing in smaller, emerging fund types. The reasons ranged from co-investment ability, better mathematics of small funds, and difficult in accessing the top 15–20 venture firms (premium fee and carry economics are a major pet peeve for family offices).
- Many family offices communicated they are increasingly aligning fund and direct investments in areas that are strategic to family operations or historical business (i.e. real estate, retail, etc.). The belief is that this offers benefits such as higher quality/less adverse deal flow, benefit to core wealth generating asset (the actual business of family), and ability to invest directly into companies through tangible value of expertise and network.
- Access to co-investment opportunities continues to be a major driver of fund allocation decisions. Unsurprisingly, family offices prefer investing directly onto cap tables of company, but voiced amenability to SPV’s. For SPV opportunities, we heard unified derision over short fuse opportunities (24–72 hours) and many wondered why more managers didn’t provide great updates on anticipated upcoming financings (regardless of whether co-investment was guaranteed).
- For those that were active in investing in SPV’s, they were generally in favor of opportunity funds (but typically near or concurrent with a Fund III offering). Finally, many acknowledged that logo investing has become rampant, often driven by the psychology of being invested in a unicorn.
- One common struggle that family offices have with respect to venture investing is appropriate portfolio strategy and construction. Thematically, many seemed to gravitate toward a starting strategy of 5–10 of sector specific thematic funds with preference for seed funds that truly lead rounds. Another strategy was to use an emerging manager focused fund of funds as a scout prior to making direct allocations into emerging funds (having a single K-1 is quite appealing to many!)
- Illiquidity continues to be major pain (to which the cycle continues to elongate) & many wondered aloud if they are really getting any alpha relative to other private strategies (i.e. 2nd-4th quartile venture funds offer sub-optimal performance when illiquidity and risk are factored). Secondary strategies were very interesting to most family offices we spoke to.
- Nearly everyone agreed that a dislocation in the macro-environment would provide a great opportunity to invest more in VC vs. pull back (clear belief that we are in early phases of a technology revolution), but the same groups admitted they pulled back in 2008–2010. It’s hard to predict of course, but my experience is fear and greed based investing is difficult to deviate from.
- Late stage valuations provide significant concern, and very few family offices we spoke to had any interest in investing in late stage venture fund investing.