Denis Shafranik, partner at Concentric says the time is right for family offices of embrace venture capital. Here's what to consider when choosing a VC partner
This summer was a scorcher for start-ups and venture capital. In July, VCs around the world closed 55 deals exceeding $15 billion, while in the UK around £1.6 billion was invested in the three months to June. Not to be outdone, Europe is also enjoying a start-up boom, with 41 per cent of business owners predicting that no one European city will dominate the tech space following Brexit, as new hot spots such as Oslo and Lisbon come to the fore.
Similarly, European family offices are waking up to the potential of venture investment, a space that has historically been dominated by US and Asian families. Based on conversations with more than 300 family offices worldwide, Concentric found that around 70 per cent are now actively investing in or evaluating exposure to tech VC. New generations are demonstrating a greater affinity with disruptive business models not to mention the higher yields they represent, hedging their typically real-economy family businesses exposure with technological ventures.
Yet, despite their desire to get involved, many family offices have had less than positive experiences of VC in the past and therefore remain wary. So, what’s the best approach, and what should family offices look for when choosing a VC partner?
Collaboration: Investing on your own is tough, which is why collaborating with an established VC partner is invaluable. VC isn’t about cherry picking stocks, but spending time with founders, to help nurture and grow their businesses, all the while constructing a balanced portfolio. This requires a daily presence in venture markets and a long-term, hands-on approach. The key is building a brand that the start-up ecosystem gravitates towards.
Hiring your own team vs. fund managers: Building an in-house VC team is expensive, and only really worth the investment for family offices with more than £100 million to invest. A second option is to outsource the VC operation entirely to fund managers but, while this might achieve the right risk-return balance, it means investment decisions occur more remotely. For many family offices, the fun comes from being closer to the action.
Flexibility: A third and more suitable alternative is a ‘hybrid model’, creating diversification across a couple of fund managers - but no more. This allows for more meaningful relationships, more access to founders themselves and the potential to outperform the rest of the market. At the same time family offices are able to leverage managers’ pipelines and contacts to deploy direct co-investments and build their own portfolios while ensuring they are managed by a professional team. For best results, managers should cover different stages of the investment (i.e. seed, series A, B, C etc.) and the various geographies where promising start-ups could emerge.
Shared interests: When choosing managers to partner with, check that they also have ‘skin in the game’, to show they’re confident in their own investments. A 1 per cent GP (General Partner) commitment will not comfort a self-made family office, sensitive to the risks and rewards of being an entrepreneur. Instead, you should be looking for a meaningful commitment. Depending on the size of the fund, a commitment of 10 to 20 per cent would signal a strong alignment of interests.
Intimacy: Having an open and transparent partnership with your fund manager is vital and this is more likely with an emerging manager, as opposed to a passive investor in a large institutionally-led fund. Ultimately family offices should be looking to build direct and co-investment portfolios, while managers must be prepared to syndicate the best opportunities to their partners. This enables a family office to build a name for itself in the venture market without paying for a full-time team.
European investors have traditionally been more risk averse than those in the US or Asia, but the time has come for them to punch their weight in venture capital. Get it right and family offices not only have the potential to see much higher returns than from traditional investments, but they’ll also play a critical role in the rise of European tech onto the global stage.
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Denis Shafranik is Partner at Concentric, a London & Copenhagen-based venture capital firm that invests in early stage tech businesses.