13 reasons Family Offices Pass on Deals

Author

Mr FamilyOffice
December 15, 2023

13 reasons Family Offices pass on deals

⛔ One of the most common words you say in a family office is “no”

No to vendors

No to conferences

No to meetings

And - for today’s topic - No to deals

Family offices are not innately negative (on the contrary, family office people are usually optimistic and positive), but there are usually a lot of deals to sift through

So if you want your deal to make the short-stack, you need to know why family offices pass on deals

1. Deal is inconsistent with the family Investment Mandate

Probably the #1 reason family offices pass on investments

A family office investment mandate is a set of guidelines or a strategy that outlines how a family office will manage and invest its assets. This mandate typically includes:

💼 Investment Objectives: The primary financial goals, e.g. wealth preservation, growth, income generation, or a combination of these

🔍 Risk Tolerance: The level of risk the family office is willing to accept in its investments

🌐 Asset Allocation: Guidelines on how to distribute investments across different asset classes

🗺️ Geographical and Sector Focus: Directions on whether to invest domestically or internationally and in which industries or sectors

⏳ Time Horizon: The investment timeframe

💵 Liquidity Requirements: The need for readily accessible cash or near-cash assets to meet short-term obligations or opportunities

🌱 Ethical or Social Considerations: Preferences or restrictions based on ethical, social, or environmental considerations

The Investment Mandate guides the family office's investment decisions, ensuring that they align with the family’s overall goals and values.

🎓 Lesson for Capital Raisers: 1) Research family offices so you target the family offices that are investing in your area. 2) Align your proposal with the family office's mandate

2. Values Mismatch

Family offices typically hold a robust set of core values, which are either deeply ingrained through multiple generations or are a direct reflection of a founder's principles

These values are usually reflected in the investment priorities of the family offices

A mismatch in values between the startup or fund and the family office can be a deal-breaker

🎓 Lesson: Ensure your company’s values and mission resonate with the family office. Research their ethical stance and cultural fit before approaching them

3. Weak Business Model

The viability and scalability of the business model are paramount. Capital raisers who lack a robust model often struggle to attract investment

🎓 Lesson: Present a solid, scalable business model. Be prepared to demonstrate the viability and long-term potential of your venture. Have colleagues and peers cross-examine your business model

4. Inadequate Governance

A startup or fund lacking a proper governance structure, such as a competent board and internal controls raises red flags for family offices (often errors come when investors like a deal so much they are prepared to overlook weak governance)

🎓 Lesson: Establish strong governance structures - board, robust internal controls, transparent reporting

5. Unconvincing Pitch

A weak or unprofessional pitch can significantly diminish investor confidence. Sometimes a shrewd investor can look past a poor pitch, but don’t count on it

🎓 Lesson: Hone your pitch. Make sure it is compelling, clear, and professionally presented. Practice and practice again. Run the pitch by different audiences. Ensure your message is clear from the start

6. Overambitious Valuation

I’ve seen some wild valuations

Startups with valuations that don't align with their market potential or development stage will deter investors

Unrealistic expectations, particularly in the early rounds of financing can turn family offices off

🎓 Lesson: Be realistic with your valuation. Ensure it reflects the startup's current stage and market potential

7. Excessive Initial Funding Requests

Requesting too much funding initially, leading to high dilution, can indicate poor financial planning and a misunderstanding of the investment process

🎓 Lesson: Request reasonable funding amounts. Demonstrate sound financial planning and understanding of the funding process

8. Lack of Competitive Moat

Without a clear competitive advantage, startups may find it challenging to secure investment. “First mover advantage” is usually not a moat. History is littered with failed first movers

🎓 Lesson: Develop and articulate your competitive advantage. Show how your startup can sustain and defend its market position

9. Domain Expertise Deficit

The absence of deep industry knowledge or relevant experience within the founding team can be a significant deterrent for investors

🎓 Lesson: Showcase your team’s expertise and industry knowledge. Highlight relevant experience and insights that give your startup an edge. If you don’t have the requisite experience.. get hiring

10. Problematic Deal Terms

The devil is often in the detail

Any number of unfair terms can eviscerate trust and kill a deal. Aggressive liquidity preferences, anti-dilution provisions, conversion rights, voting rights, dividend preferences etc. These can all undermine the deal and cause the family office to reject the deal out of hand

🎓 Lesson: Offer fair, attractive and preferably simple investment terms. Structure your deal to align with investor expectations - never try to bury terms in the small print

11. No Product

A small number of family offices are very early-stage investors, but a lack of market-ready product is often a deal-breaker. You usually need more than just an idea

🎓 Lesson: Develop at least a minimum viable product. Show potential investors something tangible and market-ready

12. Limited Market Potential

A startup's potential for significant growth is crucial. If the market size or revenue projections are modest, chances are it won’t meet the investment goals of a family office.

Startups lacking a clear go-to-market strategy or demonstrating insufficient customer traction can be viewed as high-risk investments.

🎓 Lesson: Demonstrate significant market potential. Present clear and compelling growth and revenue projections

Develop a clear market strategy. Show that you understand your target market and have a plan to capture it effectively.

13. Corporate Structure Issues

Startups structured as LLCs, S-corps, or non-U.S. entities are often less appealing to investors

🎓 Lesson: Consider your corporate structure. Align with investor preferences, which often favor certain types of corporate entities

So there we have it. Family offices say no a lot

But understanding the no can help get you to yes

𝕏 highlights

A festive one

Inheritance overtaking entrepreneurship among billionaires

📚 what to read

It’s a little off-topic, but The Escape Artist by Jonathan Freedland is the incredible story of the man who broke out of Auschwitz to warn the world. Gripping, thrilling and terrifying

📻 what to listen to

This is the time of year when it’s good to think about what is coming in the future

The Future of Everything podcast by the WSJ tries to figure out how the world will look in the future

📺 what to watch

It’s that time of the year… comfort movies. So far I only have a few planned:

Rewatching:

Top Gun: Maverick

Die Hard (first time for the kids)

The Color of Money (while playing pool with my kids)

Watching:

Mission: Impossible – Dead Reckoning Part One (probably nonsense.. but ticks some boxes)

📰 family offices news roundup

And finally…

A crazy end to the year here with long-term projects in the family office and operating companies coming to fruition. It’s paving the way for exciting times ahead. Exciting but busy as hell

As a result, I’ve been very slow on the Mr Family Office emails and DMs - if you’ve been in touch, please bear with me, I’ll get there eventually

In the meantime, have fun with family and friends, catch up soon!

Cheers 🥂

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