The venture capital (VC) asset class is undergoing a significant shift as an increasing number of family offices expand their investments into the space. While their entry reflects both a desire to grow wealth and a pivot towards private markets, there are critical aspects family offices must understand to succeed in VC. This article explores the patience, strategy and skills required for effective venture capital investing – a marathon rather than a sprint, where significant returns demand a long-term view.

The Draw of Venture Capital for Family Offices

Family offices are increasingly attracted to venture capital due to the promise of high returns, innovation and diversification. Unlike traditional asset classes, VC offers an opportunity to support and benefit from the growth of early-stage companies, often in disruptive fields. According to InvestEurope, European venture funds have consistently delivered over 20% annual returns over the past decade – outperforming even their North American counterparts. VC has become a promising avenue for those looking to expand wealth in private markets.

However, VC is a unique asset class with a learning curve that shouldn’t be underestimated. It isn’t simply about injecting capital but rather about understanding the distinct dynamics of early-stage businesses and the venture cycle.

Patience: The Core of Venture Capital Success

One of the key qualities that family offices need to exercise in VC, is patience. Unlike the stock market, where returns may materialize over a few years or even months, venture capital investments mature over longer cycles. Many European family offices new to VC expect returns within three years, but VC investments often take a decade or longer to fully realize value. It takes time to build and scale early stage companies, and successful exits like IPOs or acquisitions are lengthy processes.

Michael Jackson, a respected voice in VC, emphasizes that “big exits take time; great DPI [distributions to paid-in capital] takes time.” Family offices expecting immediate returns might be disillusioned without a realistic timeline, as they must be ready to invest consistently year after year, decade after decade, to build a successful VC portfolio.

Building and Managing a Venture Portfolio

Effective VC investing requires more than capital. Unlike most mature public companies, startups come with unique challenges: immature business models, inexperienced founders and constant challenges due to the profile of the underlying business. These characteristics demand not just funding but active involvement, guidance, and support. Investors need a deep understanding of the cycles of both individual companies and the broader market. Building a diversified portfolio with careful attention to risk is crucial.

The role of the family office advisor is also critical. Too often, advisors focus on transactions and deal flow without understanding the strategic, long-term nature of venture capital. Advisors lacking entrepreneurial knowledge and experience may rush into deals with the goal of quick wins, resulting in poor decisions and unmet expectations. Venture capital is not transactional; it’s an apprenticeship process requiring investors to learn continuously and adapt to evolving market dynamics.

The Misconception of Early DPI as a Success Indicator

One common mistake is interpreting early DPI as a positive indicator of a fund’s health. Jackson cautions that “early DPI is often a negative indicator of a fund’s future performance.” Quick distributions may indicate premature exits, which could compromise the growth potential of a portfolio company. A patient investor knows that true, meaningful returns may only appear years into the investment’s lifecycle.

For family offices, Jackson’s message is clear: venture capital demands a “decades-long strategy.” To achieve substantial returns, investors must be ready to stay committed, engage with portfolio companies and provide more than just financial backing. As he puts it, “it’s a marathon, not a sprint.”

Crafting a Decades-Long Strategy in Venture Capital

Family offices entering VC should approach it as a long-term commitment, with a disciplined, continuous investment strategy. Consistency is key; effective venture portfolios are built through regular deployment, providing ongoing support and capital across cycles, and weathering inevitable market fluctuations. Investors must embrace the reality that VC success involves a commitment of a decade or more, allowing time for startups to evolve, grow, and potentially transform into market leaders.

In conclusion, while the allure of high returns in venture capital is real, the pathway to achieving them is challenging and requires patience, skill, and active engagement. Family offices venturing into this asset class should approach it as a long-term partnership with the companies and the VC funds they support, prepared for the extended timelines, learning and commitment that this investment journey entails. Those who embrace this approach, accepting VC as a decades-long marathon, are better positioned to see the substantial rewards that lie at the end of this journey.

Simple article