by Kamal Hassan
One of the prizes in our current funding competition (closing Oct 31st), besides a meeting with Canada’s top venture capital firm, is the potential to meet one of two family offices. In discussions over the past few weeks, I have discovered that many people don’t even know what a family office is.
The best way to think of a family office is the following:
- if you are an entrepreneur who builds your business and sells it for $5M, you will probably work with a money manager, who will get around 1% annually in fees ($50,000) for working with you to manage your money
- if you sell your company for $100M, that 1% now works out to around $1M/year, and for that price you can hire a couple of pretty smart people to work fulltime just for you to manage your funds: so why not hire them rather than use a money manager?
Most people don’t know about family offices, because they tend to be very private. Why? Because it’s not good to advertise that you have money. Lots of people are looking for money: if they know you have it, they’ll ask you. A friend told me about a personal friend of his whose company was acquired for a substantial sum. The acquisition was reported in the Globe and Mail (Canada’s main national newspaper). After getting all this money, this person’s life went to crap: he spent much of his time saying no to people who came out of the woodwork with investment or donation proposals for him, often people he knew.
At the same time, family offices have a lot of money they need to invest: so they are actively looking for investments. This puts them in a funny situation: wanting to find good investments, yet desperately wanting to preserve their privacy and anonymity. This is why we got good feedback on our competition: having filtered investment leads quietly coming to them is very attractive.
What are the characteristics of family offices overall?
- they have money, and are looking for investments: this already makes them a good target for entrepreneurs
- they don’t advertise openly: this reduces their ‘deal flow’, which means if you get in front of them, you are competing against tens of other opportunities, not hundreds or thousands, as is the case with VC funds and angel groups
- they invest their own money: this means they are willing to look at investments on their merits. They don’t have to ask themselves ‘does this investment fit my mandate’ or ‘how will it look to my limited partners’. They can just say ‘do I want to make this investment’.
- a family office can often decide to invest very quickly: a family member with influence can simply decide to do the deal, on their own. Even if other family members disagree they often have a pool of money which belongs to them and they can control personally. Compare this to venture funds or angel groups where multiple people need to agree to every investment.
- family office money was often made by entrepreneurs: they can understand what it is like to run a business and may be able to empathize better than investors with a purely financial background
- it is my personal experience that family offices often invest in you as a person as much as the idea: they appear significantly more interested in your trustworthiness and reputation for integrity than the standard professional investor, possibly because they prefer never to have to swap out existing management
- family offices often have a long-term view: they can appreciate a long-term investment proposition
- family offices will often care about social goals: they have made money, now they are looking to make a difference (while making money)
- family offices are often not experts in an industry: in the rare case when the family made money in your industry, they can open doors; in the more normal case, they can’t give you much if any specialized advice or assistance
- family offices are typically not active investors: the office only has a couple of employees, whose job is to invest and manage all the family’s money, not to actively support businesses. They will help you with staff time, on a one-off emergency basis, to protect an investment. They do not want to continually get involved.
- the sweet spot for family offices is often in the $250K – $1M range: there are relatively few investors in this range, often referred to as the ‘valley of death’ for small high-growth companies. Family offices fill it well.
Family offices are actually one of the major targets for venture capital funds to fill out their fund. A VC fund will typically start with an investment from a pension or sovereign wealth fund, then round out the balance with family offices and high net worth investors. The relatively poor returns of many venture funds have got some family offices thinking about investing directly; they also have people working for them to help monitor the investment; and they may prefer the control of picking their own investees.
I’ve raised family office money before, and been very happy with the results. It’s also not for everyone. If you want someone to roll up their sleeves and help guide you through taking your business from concept to exit, while providing all the support and functions you are missing, then you are better off with a traditional angel or venture fund (a dying breed). Family offices are largely financial investors.
If you read the list of bullet points above, smile and say ‘thank goodness’, then family offices may be for you.