Taking a diligent and advised approach to venture investing mitigates risk and avoids pitfalls.
Venture as an asset class has been gaining traction. Family offices willing to invest in startups have three main options: Invest directly, invest through a venture capital partner, or choose a combination of both approaches.
When it comes to direct investment, family offices are often attracted to the lack of fund management fees as well as the full transparency they gain into the performance of their investments. This method is especially attractive to entrepreneurially minded offices.
But direct investment also comes with its challenges. Not only do family offices need to understand the latest technology; they also have to be able to assess market opportunity, identify deficits within founding teams and know how to structure deals to achieve optimal performance. Moreover, it is not easy to maintain a balanced portfolio while focusing on mitigating any uncertainty. This often requires additional and specialized staff.
In contrast, investing via a fund enables a family office to hand over responsibilities to a dedicated and trusted third party, while enabling them to support a wider range of businesses. Specialized venture asset managers with a deep understanding of the technology, the business model and the industry should be much better at pricing both risk and upside. Thus, venture asset managers are able to identify the right early-stage companies to invest in at the right time, building out a balanced portfolio. Not to forget: The stronger the investor’s reputation, the more likely they are to access the best deals.
The best venture fund managers are focused heavily on maintaining a direct and hands-on approach when working with startups. This is because early stage startups need a lot of support when it comes to business development, recruitment and product positioning, for example. This additional support justifies the standard management fees.
But choosing an outsourced approach to venture capital investment can create issues, too. Established brand name funds are often closed to new investors – and many of them tend to prefer an institutional investor base. Thus, family offices usually have to identify a venture asset manager with modest funds and a focused team of people. It is all about a personal relationship. You invest in people.
As a family office, you do not have to choose between these two ways of venture investing. You can opt for a hybrid approach: Finding a venture asset manager of your choice, invest in its funds and obtain co-investment rights via this partner in order to maintain a small number of direct investments. The latter helps you to build your own investing brand within your preferred sectors or verticals of expertise.
