After decades of investing in startups almost exclusively through fund managers, more family offices are choosing to go direct with their investments, drawn by the control and outsized returns and empowered by a new generation taking the reigns.

A family office is an organization that manages financial assets for a wealthy family (or multiple families, in the case of a multi-family office). Its role is to ensure that the family’s wealth is managed, preserved, and grown for future generations. Given their goal of increasing wealth for future generations, family offices tend to be more comfortable with high-risk and long-term investment horizons. According to a study by Goldman Sachs, family offices allocate approximately 45% of their portfolio to private equity on average. A UBS survey shows 74% of families are likely to increase their allocation to private equity as they believe these investments will continue to outperform public equities.

Historically, family offices have gained access to private assets through funds, rather than direct investments. Notably, this gives them exposure to a wider variety of assets so as to hedge the risk involved and build a truly diversified portfolio. As venture capital has proven to be an increasingly lucrative asset class over the past decade, family offices have become a popular source of LP dollars for venture funds. Investing through a fund allows a family to diversify their startup exposure, access high-quality deal flow, outsource the cumbersome process of due diligence, and save time on deal execution. Outsourcing deal flow and due diligence are key, as many family offices lack the expertise needed to effectively evaluate an early-stage company. Instead, they look to emerging fund managers, who spend their time deep in the weeds of company picking, to provide access to a high-quality basket of startup assets. Family offices and emerging fund managers are a match made in heaven, as newer managers appreciate the lower diligence threshold that family offices have as compared to institutional LPs. 

“Syndicates play a critical role in showcasing how certain managers communicate about deals. The most savvy VC managers are showcasing deals that they are syndicating, along with whatever terms they have, to prospective LPs. It helps LPs understand how they think, which is especially helpful for family offices that are thinking about going direct. It helps them start to understand what a good deal looks like, what type of traction and growth investors are looking for at each stage.” - Dave Sachse, Sachse Family Fund

In recent years, family offices have displayed a growing appetite for more direct exposure to startups. Each year, family offices as a whole have increased direct startup investments, as evidenced in First Republic Bank’s report from 2022. Family offices will often invest alongside funds to increase exposure to a certain company and as an opportunity to build their own deal flow. This trend is fueled by the younger generation’s influence, the market downturn, and new economic advantages. 

“The vast majority (72%) of those surveyed invest in established venture funds, 84% invest in emerging venture funds (which include Fund II and Fund 3) and 81% percent invest in first-time funds — a jump from over 75% last year.” - First Republic’s Family Office Survey Report 2022

The next generation of investors brings new strategies

The first wave of family offices included the likes of JP Morgan and JD Rockefeller in the 1830s, but the family office model wasn't popularized until the late 20th century. Over the past few decades, the number of family offices has grown to track with the record number of Ultra High Net Worth Individuals (UHNWIs) in the US. Unless they were in a tech ecosystem or made their wealth from the Dot-com boom, this generation of family offices was less interested in venture investments, instead focusing on familiar investments or the industry where they made their wealth. However, as millennials become more involved with their family’s wealth management, venture capital is becoming an increasingly appealing asset class. This generation is not only more comfortable with risk, but they are also able to leverage their knowledge as digital natives when evaluating opportunities. They’re better suited to seek out deal flow, perform diligence on early-stage startups, and get in the weeds with portfolio companies. Their lived experience generally allows them to make direct investments with more confidence. 

“A lot of gen ones want to hold on to how they made their original wealth — maybe it’s real estate or manufacturing or retail. That’s all they know. But eventually, the generational wealth transfer is going to happen. I see venture becoming more and more prevalent because our generation grew up with technology. We’re going to gravitate towards it more and we’re going to see more and more family offices getting into the game in the next decade.” - Dave Sachse, Sachse Family Fund

The rise of value-driven investing is also incentivizing more family office involvement in VC. Across the board, investors want to be more connected to the startups they are investing in. Family offices are more interested in funds that invest in diverse founders or impactful causes, but an even better way for family offices to control investing in their values is through direct investment.

Downturn makes startup investing more palatable

Family offices have a reputation for being bureaucratic, slow, and approaching venture investing with the same heavy-diligence lens as they do with other investments, causing them to miss out on the fast-moving, high-valuation rounds from the past few years.  They tend to have smaller teams that approach early-stage investing through a broader private equity lens, meaning they take more time to do the calculations on a company’s cash flow, growth, and exit potential and will care more about a reasonable valuation deal. 

With the economic downturn, the venture ecosystem has adjusted to slower fundraising timelines, more reasonable valuations, and alternative sources of capital outside of traditional VCs. These factors have made venture investing more palatable for family offices.

On the startup side, founders are looking toward sources of funding other than institutional VC funds as fundraising is now harder. They are more inclined to seek out family offices, syndicates, and other funding options to participate in their rounds.

Economic Advantages

Family offices were never uninterested in direct investing. In fact, several believe that direct opportunities are where they can find truly outsized returns. However, they haven’t focused on direct investing because of the back-office operations required. They were willing to rely on VC firms to handle the legal and accounting work for each investment because of the time and cost involved.

“Family offices can benefit from partnering with emerging managers who bring a fresh perspective, specialized expertise, and access to unique investment opportunities. By partnering with emerging managers, family offices can diversify their portfolios and achieve higher returns while also supporting the growth of emerging businesses.” - Leesa Soulodre, R3I CAPITAL

Today, as back-office technology improves, deals can be done quicker and cheaper. What used to take months of legal fees and a team of accountants on retainer can now be spun up in a few hours for a fraction of the cost. Direct investing also allows family offices to put more of their capital to work without sacrificing carry and management fees. Platforms like Sydecar are powering family offices by managing back-office functions like legal, banking, and accounting using standards-driven software. With the lowered transaction costs and admin time required, family offices can spend more of their time focusing on deal sourcing and diligence, and get greater exposure to the opportunities that excite them.

As the next generation steps up to managing the investments, the downturn allows family offices to get involved, and the burden of executing investments is lowered, family offices are increasingly able to act as their own VC fund and invest directly into startups.

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