Should Venture Capital be worried about Family Offices?

99 brutally honest takeaways from working in venture capital

Author

Mr FamilyOffice
December 01, 2023

Should Venture Capital be worried about Family Offices?

and

99 brutally honest takeaways from working in venture capital

It’s a bit of a collaboration this week

First up, an adapted article I guest wrote for the Confluence VC Newsletter

Then it’s an article from the Confluence VC newsletter itself

So should VC be worried about family offices?

There’s a buzz around family offices 🐝

EY’s claim that “private family capital is larger than private equity and venture capital combined” underscores the sheer economic might wielded by family offices. According to PWC, in 2022, 32.5% of all capital invested in startups originated from family offices

So in the fiercely competitive space where allocators vie for the best deals, should VC firms be concerned about family offices?

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The conventional view of family offices is rooted in the era of legacy stewards like the Rockefellers and the Grosvenors. Traditionally focused on wealth preservation, these family offices have historically allocated only modest sums to venture capital

But the times, they are a-changin

There are thought to be more than 10,000 single family offices in the world, most of which have been established in the last twenty years

On top of that, existing family offices are changing: they are opening up and becoming less siloed. They're forging strategic alliances with other wealthy families, engaging in co-investments, and actively sharing resources and best practices

And on top of that, the goals are shifting. Research by Knight Frank suggests that capital appreciation has overtaken wealth preservation as the primary goal of wealthy families

The new breed of family offices are challenging traditional stereotypes and startups are increasingly favoring family offices over venture capital as preferred partners

 

Why family offices are good for startups

Let’s be frank – it’s an old cliché that family office capital is dumb capital. The cliché goes that when capital raisers have exhausted all of the other options, they knock on the door of family offices

And while I won’t claim that there are no dumb family office allocators, relying on naïve family office capital is not a viable investment strategy

But increasingly startups are opting for family offices as their preferred investors, and the reasoning behind this choice is compelling:

 

Alignment of interests – we all know that fees can warp interests in VC/PE deals. By contrast, family office returns primarily come from the success of the venture. Family offices can plausibly claim to be more aligned with startups than VC

Long-term time horizons – time for another cliché… family office capital is patient capital. Again, there’s truth in this. Family offices are not in a rush to take cash off the table. Usually established to secure the long-term wealth of the family, family offices can focus on long-term profitability. There is no requirement to turn money over every 3-5 years. This can empower startups to focus on growth for longer

The network effect – wealthy successful families tend to know other wealthy successful families. This means startups have access to opportunities, capital, expertise and guidance. Working with one family office almost always opens the door to many more

Hands-on – startups often gravitate towards family offices with a proven track record in their respective fields. Beyond the financial backing, family offices can provide mentoring and support. Some family offices go above and beyond, assuming roles akin to angel investors. If the family office's wealth has originated in the same field, the hands-on involvement can be particularly impactful

Act quickly – family office capital is patient and relationships can take years to build... but family offices can still move quickly. Ultimately, family offices are investing their own money. This means they do not need to explain their decisions or navigate layers of bureaucracy for approval – they can move with lightning pace when they need to

 

But it’s not all sunshine and rainbows ☀️🌈

Another cliché for you… if you’ve met one family office, you’ve met one family office

That’ll be the last cliché, but again, it has a ring of truth

Anyone can brand themselves a family office, and sometimes the label can be pretty meaningless. Consequently, the caliber of the family office investment teams can vary dramatically. The SFO Alliance – an organization for single family offices to network and share best practice – demands a minimum AUM of $400 million for members, which seems like a reasonable minimum for a serious single family office capable of effective direct investing. But even high AUM does not guarantee that the family office will be adept at direct investing

There are two areas where family offices often fall short:

1) Deal flow failure – where the family office lacks the network to access top tier investment opportunities

2) Due diligence and evaluation failure – where the family office lacks a proficient team to scrutinize the deal, the market and the management team

Problems can arise when family offices venture into unfamiliar territory. Building wealth in one industry or sector doesn't automatically qualify you for investing, advising, and backing companies in another

 

Working together

When family offices lack the capacity or network for effective direct investing, they often forge alliances with other family offices or opt for outsourcing solutions. Family offices frequently engage in direct co-investments with other families or delegate their investment activities to seasoned professionals, such as multi-family offices (MFOs). Leveraging larger teams and benefiting from economies of scale, MFOs offer family offices comprehensive private capital investing solutions

Clearly family offices collaborate with venture capital firms, either to source direct dealflow or to participate in VC funds. Establishing and nurturing relationships with VC firms is pivotal for many family offices. Building the relationship helps VC firms familiarize themselves with the family office's interests and risk appetite meaning they can tailor dealflow to align with the family's preferences

When family offices choose to invest directly in VC funds, the associated costs tend to be higher, but the advantage lies in conducting due diligence only once. This means family offices can easily adjust direct investing allocations based on their evolving needs. Additionally, VC funds serve as a route for family offices to gain access to direct deals

 

Should VC be worried?

The family office sector is flying. With long-term investment horizons, aligned interests with startups, and valuable networks, some have claimed that family offices will disrupt the direct investing landscape

So should VC be worried?

I don’t think so

Family offices are taking huge strides forward. They are becoming more professional and sophisticated, but the VC machine still maintains an edge with its networks, expertise, and processes. For now

But VC should welcome and embrace the family office revolution. There is an opportunity for collaboration and innovation. By working with family offices, VC firms can position themselves not only at the forefront of industry evolution but also as a symbiotic partner

It’s a generational opportunity

I wrote this article for the Confluence VC newsletter

Confluence VC is an insightful look into the VC world, I would recommend subscribing

Here’s a taste of the newsletter:

99 brutally honest takeaways from working in venture capital

  1. There are not enough good companies out there to justify the amount of venture funds in existence.

  2. It used to be a requirement for VCs to have company building experience, but that has gone away as more funds have popped up. The advice you get from most VCs today is based on something they read and not personal anecdotes. Do not take this advice as gospel.

  3. The best founders spend the least time fundraising. If you make your diligence process a burden on the founder, you’ll have to settle for bottom-tier deals.

  4. VC Twitter is the worst place on the internet. Avoid unless you want to lose brain cells.

  5. You'll constantly hear the line "Where can I be helpful?" Most people cannot offer you help. Accept this, and move on.

  6. The most interesting investors I’ve met have the most unique backgrounds. Not saying it’s impossible to become a great investor by following the standard path, but more lived experiences equates to broader mental models. On that note, if you want to be more interesting, do interesting stuff outside of work.

  7. Everybody in VC claims to want to be your friend. It's up to you to figure out a) who you want to work with and b) who you can actually do business with.

  8. Having your money locked up for 7-10 years is not ideal, and a lot of smaller LPs are starting to realize this. This is more true during markets like the one we’re currently in.

  9. It is way easier to 3x your money at a $10mm fund than it is at a $100mm fund. It is also way easier to 3x your money at a $100m fund it is at a $1b fund.

  10. Over the past five years, I’ve known many funds that have invested based off of hype alone. No diligence, no reference calls, no thought out thesis - only an expectation that somebody else will bid higher in 12-18 months. That is changing, but it still exists.

  11. The VC tech stack for nearly every fund is ironically horrible. Spreadsheets and email are the standard. The bar is low for being “tech-driven”.

  12. Building an audience is overrated. Building a skillset is underrated.

  13. You will not build any skills on the job as an analyst or associate at a venture capital fund (unless you consider outbound prospecting as a skill).

  14. Most junior VCs are glorified business development reps.

  15. The larger the fund, the more focused your job is on sourcing. The smaller the fund, the more you'll have to be a jack-of-all-trades.

  16. Proprietary deal flow is a myth.

  17. You can raise a fund on influence, but it is very hard to scale one on clout alone (Ashton Kusher + The Chainsmokers are a few of the only ones that have proven this wrong).

  18. “Partner track” roles are not as popular as you’re led to believe. Most analyst / associate roles are two-year positions, then you're expected to find something else after that (preferably joining a portfolio company or starting your own company).

  19. If you earn carry at your fund, consider yourself lucky. 90% of junior VCs get no upside for their work.

  20. If you want to be rich, working as an employee in VC is one of the worst fields to do that.

  21. If you want to work directly with founders, you’re better off joining an actual startup. Your involvement with the founding team will peak during the diligence process, and then it will wane off from there.

  22. Selling a product or service to VCs is incredibly difficult. These people are some of the most selective people in the world, and they say "no" for a living. If these are your target customers, de-risk your business by selling to another audience.

  23. Venture capital rewards being solely focused on your job for long periods of time. If you have any plans of being multi-faceted and not obsessed with your work, there are better careers for you.

  24. Spray-and-pray seed funds do more harm than good to companies that require large amounts of capital. If a fund isn’t able to follow on into your next round of funding, it sends a bad signal to other investors.

  25. Most VCs are extremely lonely in their day-to-day. Small teams and saying “no” all day will do this to you.

  26. Venture capital is an apprenticeship game. Because of this, you’ll be expected to be in the office to get facetime. It’s tough to find roles that are open to remote work.

  27. You don’t have to focus on content all of the time (I’d argue that many new funds over-index on the importance of having a digital presence). The argument is that more content makes you more discoverable, but that really only applies to a handful of funds (most notably First Round + a16z). Benchmark is one of the best funds to ever exist, and their website looks like this.

  28. The best companies want to work with the best brands of investors. If you aren’t a tier one or tier two fund, you have to figure out another way to get meetings (this typically means more work needs to be done before the call or being closer with the founder).

  29. There are very few contrarians left in VC because almost everybody is scared to say what they actually think.

  30. Seed and pre-seed investing is all based on narrative. The easiest way to raise money is to tell a story that feeds into that narrative (AI in 2023, web3 in 2021, creator economy in 2020, fintech / embedded finance in 2018 / 2019). If you study history, a lot of money lights itself on fire chasing after these narratives.

  31. The biggest asset an investor has is his / her network, but 90% will scoff at the chance to 10x the value of their network overnight.

  32. If you don’t want the life that your boss has, why are you working there?

  33. The best deals come from people you actually take the time to get to know and become friends with. If you view every interaction as transactional ("you send deals if I send deals"), why do you think anybody would send their best deals to you?

  34. Relying on sourcing software will have you competing for the same deals against everybody else. A Pitchbook subscription will not save you.

  35. Most inbound deal flow is worth ignoring, but if somebody is smart enough to break the mold and capture your attention in email, meet with them.

  36. If you find yourself putting higher emphasis on financial projections or fund returns for seed investments, you’re thinking about it the wrong way.

  37. Serious investors back the best companies. They do not have to make up metrics or checklists to justify their decisions.

  38. If you hate virtue signaling, you will hate venture capital.

  39. There will always be an MBA that wants your job. If you’re a junior VC and think you’re indispensable, you’re not.

  40. Venture teaches you to pattern match, but by definition, you are supposed to invest in companies that break patterns. Following the same mental heuristics as your peers will get you nowhere.

  41. You don’t have to live in Miami to “make it” in venture today (spent eight months down there in 2021, thought there was a lot of noise, and decided it was not for me).

  42. If you’re doing a lot of in-person meetings, one easy way to stand out is to not dress like everyone else. Not saying to wear loud outfits, but the Allbirds + vest + Apple Watch + tech pants look has been played out, and you look like a clone.

  43. “The better the weather, the the better the network. The worse the weather, the better the worker.”

  44. “Don’t talk politics” only applies if you have conservative values.

  45. However many LP meetings you think you need to take in order to raise your first fund, double triple it.

  46. Fundraising is 90% proving track record and ability to get allocation into competitive rounds.

  47. Most “VC” online communities are trash. You’re better off finding the best one and being engaged there than trying to keep up in 10 different Slack / Discord / Whatsapp groups.

  48. If you haven’t built a Twitter audience by now, I’d argue that it’s not a great investment of your time. You’re competing for attention on the most-crowded platform, it’s not evergreen content, and good luck consistently saying something that hasn’t already been said.

  49. The earlier you decide what you want out of your career, the better off you are. Some start a career in venture to increase their options in the future, but then they never leave. Nothing wrong with this, but if you have a plan, you can realize what actions you need to take if venture is not your final destination.

For 50-99, go direct to the Confluence VC newsletter

𝕏 highlights

📚 what to read

The Copywriting Handbook by Joseph Sugarman

One of the most underrated business skills is copywriting. I started studying copywriting a couple of years ago and I haven’t looked back

I cringe when I think about how I used to write – verbose, complex, sometimes indecipherable

Hopefully I’m improving, this book helped

📻 what to listen to

“The best of what other people have figured out”

📺 what to watch

Arnold Schwarzenegger on Thinking Big, Building Resilience, 7 Tools for Life, and More

📰 family offices news roundup

And finally…

I’ve been pretty quiet on Twitter lately. There seems to be a lot of toxicity around at the moment, particularly towards anon accounts. There are certainly some scammy anon accounts out there, but there are even more scammy named accounts selling dodgy get-rich-quick courses or RE deals

The vast majority of people I have met on Twitter are absolutely fantastic, I’ve made great connections and friends. But I’m feeling that life it too fun and too short to spend time/headspace defending myself to randoms online

I will probably get back on the Twitter horse, but for the moment I’m keeping most of my daily musings to myself

The downside of less Twitter time is that I don’t get to plug the newsletter. So if you like this, please share it with others who might like it too

That’s it for today, here’s to a great weekend of family, friends and fun! 🍷

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