With traditional venture capital, angel investors, private equity and newer models like equity crowdfunding, entrepreneurs today have more access to capital than ever before. Now, add to this list: the growing prominence of family investment offices.
According to PitchBook, the number of direct investments by family offices in startups has almost doubled in the last five years. According to this Ernst & Young report, there are now more than 3,000 outfits globally managing the money of a single family — half of which were created in the last 15-20 years.
Single, or multi-family offices, which function to help preserve, grow and transfer wealth across generations, aren’t new. What’s different about them now is that they are increasingly staffed by former private equity and hedge fund managers, with existing networks in the startup world, that are more familiar and comfortable with entertaining these kinds of risk investments.
But what are some of the subtle differences between traditional models of funding and family offices — and what should startups know before approaching one or the other?
“One way to think about the differences between a venture capital fund, a family office, and an angel group (like Hyde Park Angels) is to look at how they make their investment decisions. Venture capital firms deploy investment capital on behalf of limited partners who invest in the fund, but don’t choose the companies. Family offices could be thought of as made up of limited partners who are part of the family (or are related closely in some way), and they invest their own capital. Finally, an angel group curates investment opportunities for member investors who could be considered limited partners, and each chooses their investments,” said Alida Miranda-Wolff, Director of Platform at Hyde Park Angels.
On the other side of the spectrum are startups, many of which in Chicago have found success in finding, pitching and receiving support from family offices.
Case in point: Shiftgig, a Chicago-based app and platform that connects hourly workers to businesses that has raised $56 million in total funding.
“One thing for a startup to keep in mind is that family offices might not have the bandwidth to accommodate assistance with strategy and recruiting, which VC firms are traditionally better equipped to provide. Separately, most traditional VCs reserve capital for multiple rounds whereas newer family offices aren’t prepared for multiple rounds of investments. This is not a knock on family offices; just be knowledgeable of the past investment patterns of that investor,” said Eddie Lou, CEO of Shiftgig, reflecting on receiving funding twice from DRW Capital, the venture investment arm of the Chicago-based trading firm.
DRW — which has been “fantastic to work with,” according to Lou — has a streamlined due diligence process and is getting ready to make larger investments. DRW has supported Shiftgig by making introductions to prospective clients and investing their pro-rata in future rounds of financing. “DRW acts like a partner rather than a parent,” says Lou.
Timely, then, is the upcoming 5th Annual North American Family Investment Conference, coming to Chicago this June. Organized by Campden Wealth, a global membership organization for family offices that puts on conferences and other peer-to-peer learning opportunities, the conference has seen high attendance in Chicago because of a “proliferation of high net worth individuals and families choosing to manage their investments via their own offices,” according to Brien Biondi, President of Campden Wealth.
Given the emergence of this trend,…