Are family offices the new rival for funding start-ups?
When people think about who funds a start-up until recently, that thought would have often been ‘”Venture Capitalists”. We are seeing an increasing interest in VC style investments from amongst groups like family offices that would have historically typically been largely interested in public markets. From recent reports in the FT (link below) we are not the only ones.
How much of this is driven by a change in demand from family offices and how much is this driven by start-ups’ choices of investor? The answer seems to be ‘a bit of both’.
A partner in Sequoia Capital, a US venture capital firm that has back companies that control $3.3 trillion of combined stock market value (or about 22% of the NASDAQ), said venture capital has been “operating on the business equivalent of floppy disks”. This is in no small part put down to the 10-year fund cycle common amongst VC funds. Family offices are not restrained by a fund cycle or often any real need to generate a short term return. In fact, family offices are designed to protect and grow wealth for generations and into the future. This is proving popular for some start-ups who like the idea of an investor taking a long-term view, rather than taking a perceived risk of being churned for profit in the short to mid-term.
On the other hand, there has certainly been a ‘generational shift’ in how wealthy families want to invest money and be seen to invest money. The SVB Campden Wealth Survey suggests that the new start-up investment drive is being led by the younger generations of these families. In a world that seems to change more rapidly than ever, perhaps we are seeing the start of a generation of wealthy individuals who are starting to shift away from traditional family office investing as they feel more able to ‘break the mould’.
There is undoubtedly a cachet that comes from backing a successful start-up. There is also potentially a lot money to be made of backing a successful start-up. These, combined with the fact it is now easier to gain access and communicate to start-ups, even those abroad, directly via technology, perhaps mean it is not all that surprising that family offices are successfully and increasingly entering the start-up funding sphere.
This is good news for start-ups; there is more funding available from an increasingly varied number of sources and there are arguably distinct benefits to choosing family offices as investors. This is also good news for family offices; it seems start-ups are themselves looking for some alternatives to venture capital funds and family offices find themselves in a good position to offer the alternative.
Charlie Hewlett is an Associate in the Corporate team at Boodle Hatfield and a member of the firm’s specialist Entrepreneurs Group and Harvey Tomes is a Trainee currently working with the Private Client & Tax team.