It's all in the family
The rise of the family office
Last weekend my family’s Net Promoter Score took a major hit. T’s and P’s to whomever was sitting behind us on our recent JetBlue migration.
Speaking of families, although I do not have a family office (perhaps someday if you upgrade to the paid version of this newsletter?), I’ve been closely following their rise in the startup world.
It’s now safe to say that family offices, once a “sleepy” subset of private investing, are disrupting the venture funding landscape. They’ve got the juice.
My observation is that family offices are pulling a lot more weight, and competing in a lot more deals for big placements, than they used to. And my prediction is we'll see some of the larger family offices actually lead high profile VC deals in the next five years.
So what's a family office? Let's dig in:
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What’s a family office?
A family office is a group that provides a family, or multiple families, with a multitude of wealth management services. They typically manage investments, taxes, legal matters, and other financial needs for them.
Family offices can be further divided into Single Family Offices and Multi Family Offices.
Typically the minimum amount of assets needed to create a financially focused single-family office is $50 million or greater (for all my peeps taking notes at home).
In the venture capital world, a family office may invest in startups as part of their overall investment strategy. This is in addition to other investing in other asset classes, like real estate, stocks, and bonds (yawn).
What’s the diff?
Unlike traditional venture capital firms, family offices are not necessarily focused on maximizing returns for a group of limited partners. They also have a unique set of advantages. Among them are speed, reduced reporting requirements, flexibility, and mentorship.
They only have to answer to one stakeholder, not to a whole host of needy LPs. In other words, the play call is the play call. If the head honcho wants to run full back dive up the middle five times in a row, or invest in your pre-revenue travel app, you can dial it in.
Furthermore, family offices don’t have the same public disclosure requirements as larger investment firms who take money from a host of limited partners. Not only does this save them paper (#ecofriendly), but they can make decisions based solely on what they believe is best for their portfolio company – not what will appease Wall Street or attract new investors.
To summarize a bunch of legal jargon (disclosure, I’m not a lawyer but my friend plays one on TV), if you have fewer than 15 clients that pay you a fee to manage their money, you don’t have to register as an investment advisor with the Securities and Exchange Commission. This is important because you therefore don’t have to tell everyone what assets you hold (public equities would normally show up in a 13F filing that anyone can look up). This hypothetically gives family offices an edge, as they could be sitting on a huge chunk of stock or plotting to make a big move against the market.
However, this might change - (tangent time!) thanks to the Archegos Capital blow up. On March 26, 2021, Archegos defaulted on margin calls from several global investment banks, including Credit Suisse, Nomura Holdings, Goldman Sachs and Morgan Stanley. The firm had large, concentrated positions in ViacomCBS, Baidu, Vipshop, Farfetch, and other companies. And the firm's aggressive swap strategy helped it hide it’s underlying exposure from lending banks. Basically they were sitting on a bunch of assets (read: dynamite) that would cause a domino effect if they went sour. Which they did. Woops.
Family offices can also be beneficial for startups because they often provide more flexible investment terms and a longer-term investment horizon than traditional VCs.
Other than money, time and understanding are valuable assets for startups who may need a cushion to build their businesses (and make some screw ups along the way) without someone looking over the shoulder. Family offices may relieve the pressure of having to hit unrealistic growth targets in a short period of time. When you’re a startup operator dealing with the unknown, a patient investor can be a real asset.
Said differently, they probably won't call you for updates as often.
But that doesn’t mean you can’t call them. The network and web of connections a family office has is not to be understated. Many family offices offer private mentorship from experienced business leaders who can help guide entrepreneurs through potentially difficult decisions. Imagine getting to call Logan?
What are some examples family offices?
You’ve probably heard of most of these hitters - Bill Gates, Jeff Bezos, Michael Dell, and a small retailer out of Bentonville, Arkansas… they all have prominent family offices.
And a few have even led prominent Venture Funding rounds, which I suspect will start to become the norm. Bezos Expedition led Pilot’s round, ICONIQ has led rounds for Virtru, Dialpad, Articulate, 1Password, Datadog, and MSD Capital led a round for GoodLeap, a payment application company.
If you're an entrepreneur looking for funding, it's worth considering reaching out to family offices in addition to traditional venture capital firms. In particular, study up on which family offices derived their wealth from ventures in your sector.
Family offices can be a valuable source of capital, and support, for your business, with less red tape and more lenient investment mandates.
(A big thank you to the three family office friends and readers, who, in very family office like fashion, asked not to be named.)
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