Family offices have had a rocky history with direct investments in venture capital (VC). However, many are now increasing their allocations to VC through partnership funds. Simple Expert, Kjartan Rist explains how this strategic shift allows family offices to participate in innovation while managing risk and building stronger relationships with experienced investors.

What you need to know

• Historically, family offices preferred to invest directly in startups or growth-stage companies because of the potential high returns.
• However, direct investments in the VC space require significant expertise, resources and time, which many family offices lack.
• The shift towards investing in partner funds allows family offices to participate in VC sustainably and play an essential role in advancing entrepreneurial and innovative initiatives globally.

The number of family offices has skyrocketed in tandem with global wealth accumulation. As these entities become more prevalent, their investment strategies evolve, too often mirroring the complexity and sophistication of institutional investors. This means the opportunities for family offices are vast, nevertheless complex, including the relationship with Venture Capital (VC).

Historical struggles with venture capital

Historically, family offices have had a tumultuous relationship with venture capital investments. Initially, in their life cycle, many opted to invest directly in startups or growth-stage companies, drawn by the allure of high returns. However, the direct investment route often exposed them to high risks and operational complexities they were ill-equipped to manage.

The drawbacks of direct investment

Direct investments in the VC space require significant expertise, resources, and time – skills and resources many family offices found themselves lacking. Often, family offices have learned the hard way that direct investing was more than just picking winners. It was about deep industry knowledge and managing post-investment relationships. The intricacies of direct investments, such as performing due diligence, ongoing management support, and exit strategies, often overwhelmed family offices. As a result, despite their interest in VC, many suffered from poor investment experiences.

The pivot to partner funds

Nevertheless, the attraction to venture capital has not waned. Many family offices are not only continuing but also increasing their allocations to VC, albeit many with a strategic pivot. Recognising their limitations, the majority have shifted towards investing via partner funds. This approach allows them to leverage the expertise and networks of specialised VC firms while mitigating the direct risks and management burdens. Partnering with venture funds has allowed family offices to participate in VC investments while focusing on their core strengths of strategic oversight and asset allocation.

Building specialised teams or selecting partners

A few family offices have taken the route of building their own specialised VC teams. This model is typically reserved for the largest family offices with sufficient resources to support a dedicated investment team. For most, however, the preferred route remains through fund investments, which are selected based on various criteria such as industry focus, stage of investment, geographic interests, and, not least, the chemistry and relationship with the fund manager.

The role of family offices in fostering innovation

The shift from direct investment to fund allocations doesn’t merely reflect a strategic adjustment in investment approaches; it also underscores the broader role family offices play in fostering innovation. By funding venture capital, family offices contribute significantly to solving global challenges through innovation. Venture capital isn’t just about financial returns. It’s also about being part of the solution, driving forward technologies and ideas that can truly change the world.

Conclusion

As the venture capital ecosystem continues to evolve, family offices are increasingly seen as pivotal players. By moving away from direct investments to fund-based strategies, they not only manage risk better but also contribute more effectively to the innovative ventures that need their support. This trend towards partner funds facilitates a closer relationship with seasoned investors, enabling family offices to participate in venture capital in a more sustainable and impactful manner. This strategic pivot reflects a maturity of the sector, signalling that family offices are becoming more adept at navigating the complexities of venture investments whilst playing a crucial role in advancing entrepreneurial and innovative endeavours worldwide.

Originally posted for Simple