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The Future of Family Office Investing: I

Practical lessons from 3 years of putting capital to work

Mesh Lakhani
Mar 16, 2017 · 11 min read

Update: I’ve launched a new podcast called Talk Money. You can find it on Apple or Spotify. Talk Money highlights everything our money does and teaches you to spend, invest, and earn for today’s world.

For updates on episodes & posts please go to thetalkmoney.com

Part I: Venture Capital & Early Stage Equity

Hello there, I’m Mesh. I’m in year three of managing our personal family office.

It’s a small operation, mainly just myself, but we have created a pretty robust investing ecosystem. Our allocations consist of both public and private investments. Our private investments are the result of the network we continue to build, and the value we can provide. This has given us access to high quality equity and debt opportunities. See here for Part II: Investing in Tech & Private Credit.

A Brief Background

I spent 2008–2014 at a long/short equity/equity derivatives family fund. I took over our current family assets in 2014. The stock market was reaching peak valuations and interest rates were near zero. We had liquidity with our public equity portfolio, but we lacked income and growth without the volatility of the overall markets. I looked to venture for access to growth, and alternative debt as a means to find income.

We’ll discuss equity now, but I’ll dive deeper into alternative debt in a later post.

Portfolio Allocation

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Growth: Venture Capital

The interest in investing in VC has grown rapidly in the last 5 years. The lack of growth in the public markets mixed with the emergence of successful companies like Facebook, Twitter, Uber etc. have driven dollars into venture funds.

Basic VC Facts:

Given returns take 7–10 years, it’s hard to know whether a newer VC fund has what it takes to provide returns. You’re generally looking for whether they have access to good deals, and if their previous experience provides enough:

Funds that have previous success (USV, First Round, Lowercase, Accel, Benchmark & Sequoia) are usually oversubscribed and are hard to get into.

Our Approach to Early Stage Venture

I was involved with startups and tech for a couple of years prior to taking over our family office. I was already aware of how the industry was shaped and who were some of the mainstream players.

Being familiar on the surface is helpful in the beginning, but as you dive in you will realize it’s a very closed group of people. Relationships matter a lot, and building those relationships take time.

VC Portfolio

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Red Swan VC

My first investment was becoming an LP in Red Swan VC (Red Swan III), a seed stage fund based in NYC. Finding funds that are raising capital is dependent on your network. I heard about Red Swan because the founding partners had a good reputation with their angel (personal) investments. Through my network, I knew they were raising a larger fund, and I asked for an intro. The introduction came from a friend of mine that was deeply involved with the tech community in NYC.

My Criteria:

My thought process was how do I get access to deals being led by the top tier VCs? Red Swan was nicely situated because they were a feeder fund. They received allocations into great deals because of the value they provided to the founders, relationships with other VCs and general deal flow.

Red Swan III:

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My second investment as an LP was Notation Capital I, a Pre-Seed Fund based in NYC. Investing in a fund is similar to investing into an early stage company. You’re betting on the team and people. Nick Chirls and Alex Lines are a great team. Previously, both Alex and Nick worked at Betaworks, a startup studio that spun out companies like Chartbeat, Giphy and Digg; and invested in companies including Kickstarter, Medium and OMGPOP. Nick ran seed investments at Betaworks (previously run by Andy Weissman, now a partner at Union Square Ventures), and Alex was a key architect in helping build and scale several of their companies.

Notation Capital invests in highly technical teams that can scale their companies, but don’t need a large amount of capital to get started. They are the first check into a company before institutional money comes in. Their experience, expertise and network provide provide unique deal flow and the ability to invest in valuations between $1M-5M.

Notation Capital I:

Angel Portfolio + Direct Investing

I understand that a lot of family offices and individuals want access to direct investing and avoid fees. I think the money paid in carry, is much less than one would lose doing direct investing themselves. At least in the beginning. You can invest on a deal by deal basis and pay carry vs investing in a fund and pay carry. This is called investing in a syndicate. Where you’re paying the syndicate lead a carry % if the deal exits. The benefits are:

This is an alternative to investing in a fund. I’ll talk about how you can do this on AngelList later on. For now, let me share why I suggest this based on my own experience.

Our overall exposure to early stage equity is about 15% of our portfolio. Early mistakes account for the larger allocation into Venture. Those mistakes were centered around a misunderstanding of: access & deal sourcing, valuation & check sizes.

Early Errors:

I adapted quickly and I chose to only co invest along side notable seed investors and pay them carry. Majority of this was done through AngelList, but I also did offline syndicates as well. Remember, carry is the percentage paid on profits of an exited deal to the investor who syndicated the deal.

Example: I invest $10,000 into a syndicated deal.
Carry is 20%. The deal exits at 10X.
$100,000-$10,000= $90,000 in profit.
$90,000-$18,000 (20% carry)= $72,000.

What’s hard about this approach:

Investors like Fred Wilson from Union Square Ventures generate large returns because of the ability to continuously invest in companies where he has conviction. Below are two examples of IPO’d companies USV invested in: Twitter & Etsy.

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USV’s Investment in Twitter (taken from Crunchbase)
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USV’s Investment in Etsy (taken from Crunchbase)

AngelList:

I’ve used AngelList to invest in several early stage deals. There are several private deals that get syndicated on the platforms, and they’re 100% private. Investors that receive allocations into deals led by top tier VCs may syndicate them on the platform and charge carry. It’s a great option for getting the “access” that I’ve mentioned several times in this post.

One still has to be cautious about you build a portfolio here. If you understand how you want to build a portfolio (thesis, concentration, ownership), then make sure you’re investing with leads who are not only getting access, but are getting pro rata rights as well. I’ve seen tons of “high quality” deals get syndicated through the platform.

AngelList does offer no-fee, carry only funds for portfolio construction and diversification. More information on these funds, you can visit https://angel.co/access-fund/fund.

Both Dave Eisenberg (Red Swan Ventures), Notation Capital & many notable investors/funds leverage AngelList to syndicate deals on a deal by deal basis. Many syndicate deals offline as well.

Expect to see following posts on investing in alternative debt (our specialty), and more. Email me at mesh(at)mk2c.com

Delayed, but many thanks to: Alex Pack, Dave Eisenberg, Kalsoom Lakhani, Naval Ravikant, Nicholas Chirls & Rennick Palley for reviewing drafts.

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Startup Grind

Stories, tips, and learnings from and for startups around…

Mesh Lakhani

Written by

Investor: Mark 2 Capital http://www.mk2c.com/, https://angel.co/meshlakhani /

Startup Grind

Stories, tips, and learnings from and for startups around the world. Welcoming submissions re: startup education, tech trends, product, design, hiring, growth, investing, and more. Interested in submitting? Visit our submission form here: https://airtable.com/shrShpeN89HrzCzOB

Mesh Lakhani

Written by

Investor: Mark 2 Capital http://www.mk2c.com/, https://angel.co/meshlakhani /

Startup Grind

Stories, tips, and learnings from and for startups around the world. Welcoming submissions re: startup education, tech trends, product, design, hiring, growth, investing, and more. Interested in submitting? Visit our submission form here: https://airtable.com/shrShpeN89HrzCzOB

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