What a family office is
Family offices are a particularly important source of capital for small-to-medium-sized businesses. According to the Family Office Club, there are currently more than 3,000 family offices in the U.S., and these offices, which generally have a minimum of $100 million in assets, often look at alternative investment opportunities — which could be your startup.
While family offices can be elusive and highly selective, referrals, trusted networks or entrepreneurship conferences may provide entry. The company seeking funding must also align with the family office’s investment criteria and philosophy. Many have a predisposition to invest in companies directly or indirectly related to the core business on which their success is built.
Ultimately, any new investor is betting on both the business plan and the founder/CEO. Conversely, the founder/CEO needs to find and identify a new investment partner who has a long-term view and the time and interest to help propel the business forward.
If you’re being introduced to a family office by a financial firm, there can be fees associated with the transaction. All investors will want to understand the exit strategy of the investment and clearly articulate that it’s important.
If a family office chooses to invest in your business, you may find that family offices:
- Provide incredible connections
- Are able to take advantage of a situation where markets may cease to function in a regular manner
- Are more patient than institutional investors or private equity
- Appreciate how much work has to go into starting a successful company
- Serve as mentors
When Morten Middelfart went searching for seed investors for Social Quant, his Twitter analytics company in Tampa, Florida, his banker suggested pitching a local family office. One informal meeting with the private investment firm, which manages the wealth of individuals and their families, was all it took to land Middelfart’s venture a high-figure investment early in 2015, along with ongoing advice, customer introductions, and part-time office space.
Such experiences are rare, but they do happen, and more family wealth-management groups are betting on private equity deals. There are some drawbacks: Family offices can take longer to seal the deal than traditional angels and VCs, and they generally have a lower tolerance for startup failures, warns David McCombie III, founder and CEO of McCombie Group, a Miami-based private investment firm that has invested about $10 million in half a dozen startups in the past three years. But, he adds, many enjoy advising and supporting founders beyond simply writing a check. Plus, they have buckets of cash.