So there has been a lot of chatter recently about evolution and disruption around the venture capital model. Crowdfunding, Solo GPs and SPACs seem to be some of the biggest disruptors. There are also new forms of non-dilutive financing through the likes of Pipe, Capchase, and Earnest Capital. The innovation is incredibly exciting, especially for entrepreneurs as more and more financing options and doors become available it will only give founders more choices and the ability to find the right type of financing for their business. But what kinda shocked me is that in all the chatter there is very little mention of another funding source that has quietly and quickly grown and in terms of $’s available to the market, could dwarf all of the other options we highlighted above, Family Offices.
Family office metrics are tricky to summarize but best estimates put the number of assets they have under management sits around $6T. If we assume 10% of that, or $600B, are allocated to alternative assets. Just to put that in perspective, all of VC raised $70B in 2020. A recent SVB Family Office survey and report that families are engaged in venture deals directly 75% of the time versus exposing themselves to venture capital funds, 76%! Now not all of that $600B is actively being deployed just yet (roughly half was deployed in 2020).
If that 76% remains consistent and the $ volume from these families continues to grow at 11% annually (all according to the SVB FO report) then that will represent a whopping $340B in capital allocated for direct investment in venture deals!
Now family offices have historically been a tricky audience to reach for founders. But that trend is changing, more and more Family Offices represent the first few generations of tech startups that have now become larger publicly traded companies or have been acquired. Second, more “older” money is starting to rapidly transfer from an older generation that maybe have built in a more traditional industry, but the younger generations are increasingly wanting to invest that wealth into tech and more progressive industries.
So what does this all me for the venture capital scene? Well more and more direct access from family offices that are actively looking to source and invest in deals. You will probably see a huge number of VC professionals taking investment jobs in family offices over the next decade and being tasked with publicly representing the family and sourcing and managing deals. The interesting part of that is the pressure it might put on the 2 and 20 model. Families will invest their own money and they can put their investors on salaries as a staff member of the office and then workout a carry structure that is more closely tied to IRR. This is a huge win for the entire model and founders because, without management fees and dynamic carry, families and their teams will be working on healthier starting economics and a more aligned incentive structure.
Second is family offices value cash flow more than a fund (no management fees to pay the bills) so as they invest on their own balance sheet they will be more likely to explore non-dilutive, cashflow generating forms of investment to mix with venture dollars. This mix is a huge win for founders, enabling you to mix and match forms of capital and tailor investments to match your business versus you pigeonholing your business to fit what is a very rigid venture model.
Venture capital and startup financing is rapidly evolving and the role of family offices has just begun. A sleeping giant with Billions in dry powder could drastically alter both the early and later stages of a startup's lifecycle. While other forms of capital innovation enter the market and are certainly generating plenty of excitement, family offices loom as easily the heaviest capitalized player in this market and if they choose to really turn up the heat they could easily put tremendous pressure on the rest of the market and at the same time create a wealth of new opportunities.