3 Questions to Determine Whether a VC Firm or Family Office Is Your Startup’s Best Fit
More family offices are taking a page out of the venture capitalist playbook and investing directly in early-stage companies. Here are some questions entrepreneurs should ask.
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You probably don't think about family offices--firms that oversee one or more family's assets. After all, they're usually seen as stodgy investors who prefer more traditional public-market equities to startups. And, until recently, this was true.
Now, a growing number of family offices are taking a page out of the venture capitalist playbook and investing directly in early-stage companies. Reported deal volume from family offices in 2015 was roughly six times than in 2010, and family office deal volume growth outpaced that of traditional VC between 2011 and 2017, according to Crunchbase.
My husband, Ian Simmons, and I established our family office, Blue Haven Initiative, in 2012. We knew we wanted to create a portfolio with social and environmental factors considered with every investment we make across asset classes, from private equity to fixed income. We also wanted to make direct investments in companies working to improve standards of living, create economic opportunity and deliver products clearly and efficiently in sub-Saharan Africa.
We understood the importance of providing early stage--and patient--capital to entrepreneurs. Setting up a single-family office has allowed us to do just that.
Family offices like ours often have the flexibility to stick with companies they believe in for the long haul. But in my experience, many founders don't know much about how family offices operate as investors. So, here are three questions you should ask--or find out:
Is the investor leading with head or heart?
Are the investors knowledgeable about your area of expertise or not? Is the investor strategic or a generalist?
Let's face it--some family offices invest in whatever piques the family's interest at the moment: Today it might be real estate. Next week? Perhaps it's blockchain.
If you're looking for this kind of financial investor, one who might write a check and stay out of your hair, that might be a great fit. But if you're looking for more strategic insight and partnership, there are family offices that specialize in your industry, whether it's fintech, healthcare, renewable energy--whatever.
You want helpful partners, not just passive investors. The strategic aspect is what might make venture capital appealing, too. VCs spend every day talking to founders and entrepreneurs, so they have a better understanding of your trials and tribulations than a generalist family office does.
Remember, your fundraising history tells a story--and each round should advance the plot forward. If you're a late-stage company that chooses a generalist family office with no strategic value to lead a round, you're signaling to your audience that you're treading water. It doesn't articulate a clear vision and direction for the company.
What's the investor's time horizon?
It's fairly common knowledge that most VCs push for an exit four or five years after their initial investment, and that might make sense in your situation. Perhaps your business is better suited to shorter term capital.
Maybe you want to grow faster because that's how you're going to gain market share. Traditional venture capital really pushes breakneck growth acceleration in a short period of time, and maybe you're an entrepreneur in an industry where that is exactly what you need.
However, a single-family office may do its direct investing in a more evergreen style, exercising patience and taking a more long-term view. This can be greatly beneficial if a less rigid timeline is well-suited to your company's growth cycle.
Find out how long the family office typically holds direct investments. Don't automatically assume its time horizon is longer than a VC's.
Will they open doors?
Let's say you're a startup that receives a sizable investment from Omidyar Network, which was co-founded by eBay founder Pierre Omidyar. You might dream about getting acquired by eBay when, in fact, the family office has no influence over eBay's acquisition strategy.
Don't assume connections to successful entrepreneurs will give you access to the companies they founded. Ask yourself: Are you accepting this money because you're dazzled by a big name and the access it suggests, or because it makes sense for your business?
There's also the publicity and cocktail party conversation factor. Often, VC firms will make flashy announcements about its investments. Some venture capital firms have great brand recognition. This may help you fundraise by attracting other potential investors.
Family offices, by their nature, don't need to focus on attracting outside attention. They're often much more private. If generating buzz for your company through publicity seems important, ask what the plan is so that everyone is on the same page.
Family offices can be great partners and resources for entrepreneurs. So can VC firms. Much like building a business, it's a process: Do your homework and ask questions to find the right fit for you and your company.