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Family Offices Pursue Direct Investment Strategy

When the topic of startup funding crops up, most will immediately think of angel investors or venture capital funding; probably because founding a potentially high-growth business is exciting and these buzzwords sound exciting too as far as finance goes. A lesser-known but increasingly attractive source of funds for startups is in securing family office investment.

A family office (FO) is lesser-known as by their very nature, they want to be unknown and want to go about their investments free from constant speculative applications for finance from new businesses. Until recently, investing into venture capital (VC) funds was a way for a FO to remain under the radar and benefit from the outsourcing of due diligence whilst still having a way to diversify portfolios towards those enterprises whose vision aligned with their own.

Over the past few years, it appears that family offices are more inclined to get involved at an earlier stage in an organization and do so directly as opposed to through a fund. Several factors have coincided to drive this more direct strategy including the sheer growth in numbers of family offices worldwide since the millennium, regulatory requirements and globalization, the increased role of younger family members in an office and the propensity of families to take a more active role in investments since the financial crash of 2008.

Startups Reap Benefits from Direct Investment

Unlike a venture capital (VC) or other investment fund arrangement, family offices are not on a deadline to show returns to a large group of investors and can therefore be ‘picky’ in the type of business they invest in. Furthermore they don’t suffer the external pressures of what, when and how to enter and exit investments.

Quite often a family office will look further than the numbers for a deeper connection with the business owner and management team, preferring to put their funds into something that resonates and sit on it for much longer. In recent years, it’s also become much harder to secure elusive angel and VC funds so not only is the appetite of the family office to deal directly growing, the ease and benefits to the founder are difficult to argue...

  • Deeper Pockets

Family offices are created to manage the wealth of ultra-high-net-worth individuals (think ex-Amazon founder Jeff Bezos) and so it follows that they’re not reliant on raising any funds from elsewhere. There’s no limits on what they could invest, it’s just inherently difficult to find them and they’ll be looking for a smart team with the grit and determination to succeed.

  • Long-term Commitment

In general, a family office takes a longer-term view on wealth management than other investors. Wth the uncertain economic times we’re living in, family offices are more patient and offer more flexibility when a business has to change direction to allow for unforeseen and unpredictable market conditions. A family office understands with the bigger risks of investing earlier in a startup come bigger returns if they’re in it for the long-haul.

  • Family Office’s In-house Capabilities

Family offices often have in-house professionals who have specific expertise from their past careers which can be utilized to support the growth of the startup. It’s common for a FO’s staff to have been successful entrepreneurs themselves and bring a wealth of knowledge to the table and also an impressive contact list that may be leveraged to further the business including strategic partnerships and even customers.

  • Faster

Regardless of the stage of growth the startup is at whether it’s seed, launch or breakthrough, when finance is required it’s usually needed fast. Family offices can often be more nimble in their decision-making processes and equip a business with funds when they need it with less formality.

  • Greater control over strategy and direction

With other forms of early-stage funding, founders may be realistically required to surrender a huge part of their business and along with that, their decision-making ability. While family offices will certainly expect a say in their investment, they tend to have a greater appreciation for a founders and their teams’ achievement in getting the business off the ground in the first instance and a recognition of their commitment which probably affords a greater degree of decision-making responsibility.

Post-COVID Investment Growth

Despite a temporary deviation in 2020, the family office’s direct investment in startups, particularly those with a heavy Environmental, Social and Governance (ESG) aspect, will continue to grow. Figures for the Canadian market are hard to come by however there’s much anecdotal evidence to suggest the growth rate of startup investing by FOs vastly outpaces that of venture capitalists. Globally, direct investing into startups increased six-fold over the decade up to 2020 and on a dollar level, direct investments surpassed fund investments at 54% versus 46% as a percentage of the total.

With younger generations taking up the helm of the family office, indications are that they increasingly want to invest in high-growth, innovative and sustainable companies plus they prefer to deal with their peers on these opportunities. That’s not to say there aren’t challenges for these next-gen FO managers, such as an increasingly competitive market and soaring valuations but they certainly don’t seem to be dissuading them from investigating any and all opportunities should they fit with their expertise and longer-term goals.

Invest in Ontario

At Private Capital Group, we guide many single and multi-family offices in their investments in the mid-market space. As Toronto and the Waterloo region continue to attract the attention of tech entrepreneurs globally and interest rates are holding low for the foreseeable future, there’s never been a better time to consider a direct investment in Ontario. Reach out to one of our presidents for a chat about the opportunity in our flourishing province.

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