A Family Office Investment Guide: Alternatives to Venture Capital

By Toptal Expert Vidur Gupta

Toptal

From 15th Century Florence…

Family offices began investing in early-stage ventures centuries ago. In 15th century Florence, the Medici family actively supported young artists by investing in their works (venture capital of its day), patronage which provided the start for some of the greatest masters of all time from Leonardo Da Vinci and Michelangelo to Galileo and Botticelli. Amazingly, this was 500 years before the first formal venture capital firm (ARDC) was founded.

…to Present Day

Fast forward to the present day. You are probably familiar with such household VC names as Sequoia, Andreessen Horowitz, Benchmark Capital, and Kleiner Perkins — firms that comprise the investor bases for ultra-successful startups such as Uber, Facebook, and WeWork. But make no mistake: Capital allocated by family offices also exists within these capital stacks, albeit quietly. One simply wouldn’t come across these secretive names unless one knew where to look. For example, in the upcoming IPO wave, there are unicorns such as Pluralsight that are backed by a multi-family office, ICONIQ, belonging to the Zuckerberg and Sandberg families, alongside mainstream venture capitalists like Insight Venture Partners.

Over the last five years, I have met many an entrepreneur who has expressed curiosity about the largely under-tapped world of family offices (“famos”). Some entrepreneurs come across low-profile famos in high-profile deals, while others are introduced or inadvertently advised to reach out to famos by traditional/existing investors, as an alternative source of capital.

This article isn’t intended to advocate for or against family offices as a captive investment source. It is instead intended as a broadly informative guide for those less familiar with the niche. I also hope to expose its potential as a source of patient and strategic capital for the entrepreneur who takes the time to seek it out and understand its workings.

The Family Office…in 60 Seconds

Family offices are a wealth management concept wherein ultra-high net worth individuals or families pool their liquid wealth with the express aim of preserving and growing it. Pioneered by John D. Rockefeller, this asset class has mushroomed over the past three to five years, owing to the deluge of wealth created by capital markets following the 2008 boom in stocks and bonds.

The roles, responsibilities, tasks, and duties of family offices range from the mundane (payment of bills to their staff) to the specialty, such as investing capital and managing complex portfolios across varying asset types and classes. The latter of these two categories is usually led by a professional asset manager, employed to steward the office’s investments and investment strategies — an individual/team typically overseen by a member or group of members of the family.

Types, Incidence, and Concentrations of Family Offices

Family office wealth can be first, second, or multi-generational, ranging from “old money” such as that of John D. Rockefeller to new-age technology affluence such as Sergey Brin’s Bayshore Global Management. Family offices can be single-family offices, which bear a high cost of management of at least $1 million, or multi-family offices where multiple families pool resources to create a single office.

There are more than 10,000 family offices worldwide and $5.1 trillion of ultra high net worth wealth according to Ernst and Young’s family office guide. Family offices are based in a few key cities which satisfy a raft of requirements for the globally-mobile and asset-rich families, which include strong governance institutions and practices, a private/secretive banking system, and political stability. Luxembourg, Hong Kong, London, and Switzerland have long been hot favorites, with Dubai not too far behind.

Source: Toptal

I shall refrain from any discourse around the intricacies/workings of family offices and the lifestyles that their progenitors lead. For those seeking more information, examples of the autonomy, pace, operation, and style of a typical family office can be found here, as seen through the eyes of an ex-employee. Remember, though, that, overall, for a cohort that is about 10,000 in size, any generalization should be taken with a grain of salt.

How Family Offices Allocate Their Capital

Let’s start with a top-down view of what famos typically invest in. Based on a report by UBS, the origins of a given family’s wealth determines the family offices’ risk appetite, its investment style, and its allocation choices. US and Asian families are most keen on investing in “growth” assets, with heavy weighting toward venture capital and private equity.

Source: Toptal

iCapital research shows that first-generation sfamos tend to prefer alternative assets such as real estate, private equity, and venture capital. In addition to the generation, country, and origin of wealth, the sfamos’ strategy is also defined by the size and stage (institutional maturity/experience) of the family office itself.

Hacks for Finding and Impressing Family Offices

Prelude to the Search:

Entrepreneurs should bear the following in mind as they prepare to initiate their respective searches for compatible family offices.

  1. A carefully planned, patiently executed, strategic search is the answer. As mentioned, famos deal in secrecy (they believe it necessary to protect their families’ interests). As such, it is unlikely that you will find Bill Gates’ Family Office with a website, let alone one that details its investment manager, its current portfolio, and a “contact us” link. Be prepared to get creative with your search.

Interested in learning more about the nuances to, and strategies for attracting Family Offices? Read the full article here.