Family offices have been on the rise as an important source of startup funding. They have emerged as investors and taken an active role in shaping up the startup world. Family offices have been closely associated with the ultra-wealthy. In fact, many are high net worth individuals. More family offices are breaking free from stereotypes to become active startup investors.
A family office is a company that manages the financial affairs of an individual or family. A single wealthy individual or a group of businesspeople can create a family office.
Family offices typically operate as a non-corporate structure. They specialize in managing and controlling large sums of money and wealth. Their structure also makes them the ideal investment vehicle for startup companies.
Family offices are a vital part of the Silicon Valley ecosystem. They provide an alternative route for early-stage founders. For example, getting equity or debt financing for their startups. The office becomes vital in the investment chain where traditional funding fails.
Family offices are becoming popular as entrepreneurs seek capital for their young companies. They entrust their wealth to managers who invest in technological businesses in need of funding. These companies are less likely to compete with profitable long-term family businesses.
Why Family Offices Invest in Startups
Sometimes, family offices are the only avenue for early-stage investment for founders. This is a tactic popular among some businesses that seek funding but chose to stay as private firms.
Few founders meet their goals without the right kind of help. Family offices support founders and offer the guidance they need to succeed. They also serve as co-investors and advisors that help founders manage their business.
Though their services are often more dependable and diverse, family offices appear to be inferior to angel investing. This is due in part to the thought processes of the founders themselves. But the rise of family offices has put family-friendly investing back on the table for entrepreneurs seeking capital.
Here are three main reasons why family offices invest in startups:
1. Generate a Return on Their Portfolio
Family offices are some of the best investors globally. This is because they can see long-term potential. Additionally, they can identify innovation and growth opportunities early on. This is unlike most corporate investors.
Family offices invest because they have a deep understanding of personal finance and investing. They know what it takes to get a return for their money and are more willing to risk something of theirs to make it happen.
Family offices are often the first to realize that one can make money by uplifting startups. And because they know how to spot good companies early on, they play a crucial role in helping founders grow once they realize their potential.
Since family offices are private investment funds, they are safe from the volatile market conditions. This enables them to craft strategies that maximize long-term profits while minimizing risk.
2. Risk Diversification
Due to uncertain economic times, investing in venture capital has become more sought after. As a result, family offices are looking at ways to diversify their investments as well. One option is by shifting a part of capital into a mix of venture capital and other investment options.
Pro investors are paying attention to the tech industry. Notably, startups have become a major source of innovation and growth. Family offices have significant potential to encourage franchisees to innovate in creative ways.
3. An Avenue to Support New Technologies
Family Offices are generally bankrolled by wealthy individuals, not corporate entities. They are often involved in charities and religious activities. Family offices are also generally very interested in technology and financial innovation. This is due to their belief that all businesses rely on some form of financing to achieve success.
They also believe that these businesses have the greatest potential for growth within their networks. Family offices believe that creating value for another human being is more significant than any monetary gain.
How Family Offices Invest in Startups
Innovative startups are a reflection of their bold, innovative founders. Yet, the family office trend has emerged as an extra pillar for survival and the growth of startups. Each firm has its unique mission, values, and culture. This helps it differentiate itself from other firms in the industry.
Family offices have to bear the task of assessing the long-term viability of a startup enterprise. This involves:
- Researching industry trends
- Conducting market research, and
- Identifying potential growth opportunities within their clients’ markets
Family offices “find” startups by networking. They facilitate this search by providing a platform to connect entrepreneurs with mentors. It’s a way for companies that can potentially bring a new venture to life.
Participation in investing in startups has taken three different forms:
- Seed funding
- In-kind support, and
- Structural support
Family offices can provide a supportive environment for early-stage startups, through offering;
- Capacity-building support
- Experienced mentors
- Strategic planning
A family office can be an angel investor, a meaningful relationships-based organization. It can also be a venture capitalist seeking to capture high-risk, high-return investments in startups. This is achievable once family offices understand the needs of a specific startup.
They begin to take part in ways that can shape that company’s destiny for years to come. Family offices can also serve as seed investors or initial investors. They particularly come in handy for companies looking for conventional investment.
When it comes to family offices making investment decisions into startups, there are a few things to keep in mind:
- The type of family office you work for will impact the type of investments you can make.
- Different family offices have different investment goals and objectives. Some family offices may invest in companies that provide essential support services. Others prefer startups that target specific industries or provide growth for their members.
- Family offices need to understand the specific needs of their members to provide the best investment options.