Knowledge

“For the past 40 years in the US, equity returns have been driven by new business - not by old business.”^[1]

The traditional view of the family office is that of a prudent organization, focused on conservative investment strategies and the preservation of family wealth.  Conversely, venture capital is viewed as high risk, driven by speculative investment, novel technologies and startup failures.  The two sectors seem misaligned, and yet family offices are increasingly engaged with venture capital.

For instance, the JP Morgan Private Bank Global Family Office Report 2023 notes that family offices allocate 46% of their total portfolio to alternative investments (including venture capital).  The World Wealth Report notes that family offices and high net worth individuals now contribute as much as 10% of all capital in venture funds.^[2]

The question then arises, why do family offices invest or engage in venture capital?

The quote above provides some insight.  Equity returns are frequently driven by new business, not old business.  At their core, family offices seek returns.

But this is not the full story.  There are a number of other factors, including cultural alignment between founders and families, the focus of younger generations on technology, and the social objectives of families, which drive family office interest in venture capital.

This article will examine how family offices have historically been involved in the venture capital space, before looking at modern examples of how family offices engage with venture capital.

The historic role of family offices

There is nothing novel about family office investment in venture capital.  In fact, private family wealth was instrumental in creating the VC market.

In VC, An American History, it was noted that “the basic model of VC fundraising revolves around the intermediation of risk capital” and the early nineteenth century whaling industry reflected this intermediation.  The whaling industry was funded by wealthy families, providing finance to distant, high risk ventures, in which they had limited knowledge or experience.  The author noted that in New Bedford, a large amount of venture financing was provided by Quaker families, who were willing to engage in trust based transactions owing to tight social relationships between the families and venture partners.^[3]

Later, in the twentieth century, it was observed that “the first generation of professional VC firms in the US stemmed from earlier funds and personal networks set up by very wealthy industrial families, such as the Rockefeller, the Phipps and the Carnegies”.^[4]  These family funds backed investments into the then nascent industries of aviation, automobiles and photography.

Some family funds would later develop into professional venture capital funds, such as Venrock and Bessemer Venture Partners.  One key example is the VC firm, Kleiner Perkins, which was set up in the early 1970s with an initial $4M investment by the Hillman family office into an new fund.  The first fund, KPCB Fund 1 returned $345M to its investors.  Kleiner Perkins went on to launch a further 18 funds, while making over 1,500 investments over its history.

Modern trends in the venture capital space

There are a number of ways in which family offices engage in venture capital.  Common approaches include direct investment in VC funds, direct investment in startups, or hybrid multi-family offices which launch their own funds.

Direct investment in venture capital funds

As nearly 10% of all capital in venture capital funds is provided by family offices, they are highly sought out by fund managers as a source of capital.  Similarly, family offices seek venture capital investments in order to achieve a balanced portfolio. 

Additionally, some families invest in venture capital as a means of aligning with their social objectives.

In terms of portfolio allocation, venture capital is a risky asset class but can deliver high returns, and is therefore an important part of any balanced portfolio.  A key mandate for any family office is to maintain family wealth and, therefore, venture capital can play an important role in portfolio management.

However, many families also have social objectives, and may wish to contribute to the social and economic development of their communities.  By investing in venture capital, which focuses on the startup sector and new technology, family offices can choose an investment class which aligns with wider social objectives.

For instance, Indonesia is notable for the large number of family groups that invest in the VC space, particularly through direct investments in local venture capital funds.  Some notable examples include:

• A signifiant initial investment by the family-owned Lippo Group in Venturra Capital, a venture capital fund focused on early stage high growth business in Indonesia and SouthEast Asia. 
• A limited partner investment by the family owned Bakrie Group in Convergence Ventures, an early-stage Indonesian-focused venture capital firm. 

There are many other examples, and Indonesia remains one of the most vibrant regional start-up markets in South East Asia.

Direct investment in startups

Another way in which family offices engage in venture capital is by making direct investments in new ventures or by setting up their own venture capital arm.

A number of factors drive families to invest directly in startups and lead founders to seek family office investment.  These include:

Generational change

Generational change is often a catalyst for investment into start-ups.  Younger generations may be more aligned with technology and innovation and seek to invest in the sector.  Furthermore, it may align with family succession needs to invest in start-ups.  One author noted that “often, the next generation of a wealthy family struggles with maintaining the family legacy, while embracing change and modern investment opportunities.  Venture capital provides the next generation, and by extension the family, with access to new technologies and founders who will innovate.”^[5]

Alignment of family and founder values

Startup founders are entrepreneurial in nature, and this frequently finds resonance with families.  For instance, the founders of many families are, themselves entrepreneurial.  The Hong Kong magnate, Li Ka Shing started his career by selling plastic flowers, which were a novelty at the time.  Furthermore, the second or third generation may possess a more entrepreneurial spirit, particularly in relation to technology.

Alignment of family and founder interests

Aside from value alignment, there is also an interest alignment between founders and families.  Founders may prefer to seek family office investment, as opposed to venture capital investment, owing to the short term investment cycle of venture capital.  VC funds usually have a fixed investment cycle, focused on returns within a set period, whereas a family office may take a longer view of the investment, providing stability to the founder.

Social and economic vision

As discussed, social objectives frequently drive family investment in the startup sector.  Looking again at Indonesia, we can see that some family groups have set up tech incubators in order to develop and mentor the next generation of startup founders.  Notable families include the Ciputra Group, which set up the Ciptura GEPI incubator, and Djarum, which set up Merah Putih, Indonesia’s first tech incubator.

As well as investing in startups directly, some family offices establish dedicated arms, designed to invest in new ventures in a more systematic fashion. 

An interesting example is Sattva Ventures, an early to mid stage investment platform established by an Indian family office.  Notably, the investment approach of Sattva Ventures is to invest ‘beyond capital…with a vision that transcends conventional boundaries more than investors; we are partners on a transformative journey’.  Again, we see that values, as much as returns, drives family office investment in the venture capital space.

Multi family office funds

Recent years have seen a growth in hybrid multi-family offices, which provide investment advisory and related services to their family offices.  A number of such offices are increasingly involved with venture capital. 

Perhaps the leading firm in this area is Iconiq Capital, a multi-family office with $80BN of assets under management, which manages the wealth of many leading families, including those of the Silicon Valley and Hollywood elites.  Iconiq is notable for its focus on the venture capital industry, having raised seven growth funds to date.

Given the rise in multi-family offices, one may expect more offices to branch out from pure advisory to a more active fund management role.

A tale of caution

It is clear that venture capital is of increasing interest to family offices, whether in terms of portfolio management, involvement in new markets, social objectives, or a change in generational outlook.  The sector allows for innovation, with the aim of wealth preservation.

However, the area is not without risk for both family offices and their advisors. 

Family offices need to consider economic and portfolio risk.  Venture capital is a speculative industry, heavily exposed to market cycles, with a large failure rate among startups.  Even seasoned veterans get burnt.  For instance, in 2023, Silicon Valley Bank, a dedicated lender to the VC and startup sector, with over four decades of experience, collapsed as a result of various factors, including high interest rates, a collapse in the tech industry, and over concentration on risky assets.

Family offices also encounter inefficiencies, as a result of skills or knowledge gaps, when considering venture capital and startups.  Venture capital is a highly transactional environment, which requires specific insight and experience, both in terms of financial, market and legal knowledge.  Conversely, many family office advisors have historically come from the trusts, taxation and private wealth sectors, and may confront a steep learning curve where families consider venture capital.

A further consideration is the highly relationship based nature of the venture capital and startup markets.  It is a highly networked environment, and VC firms typically have deep and extensive relationships in the sector.  This can be difficult to emulate for family offices, who are exploring the market and may lack the same relationships.

Notwithstanding the risks, it is clear that family offices can and do invest in venture capital firms and startups, or establish incubators, and achieve success in the sector.  Venture capital is a dynamic and changing arena, which provides access to novel technologies new ideas, and the potential to make a change.  Venture capital has a historical relationship with family wealth that continues into the present day.

This article was first published by Hubbis in December 2024.