Why Startups Should Avoid Raising Capital from Family Offices

Entrepreneurs in the US have various funding options, but not all are equally beneficial. This post explains why family offices may not be the best choice for early-stage startups.

What is a Family Office?

A family office is a company established to manage the finances and investments of a single or a group of wealthy families. Despite the differences in their setups, all family offices focus primarily on preserving personal assets and investments, often leaving business management to other internal functions or professional service providers. The family office team typically includes the primary benefactor, investment managers, chief of staff, an accountant, and administrative support. Some are small with a handful of people, while others are large conglomerates with hundreds of employees.

Why Family Offices May Not Be Ideal for Startups

Family Offices Invest Little in Startups

While the average family office manages $1.2 billion in assets, they usually allocate only 5-10% to venture capital, roughly $60 million. Top-tier VC firms demand far more substantial commitments, meaning few family offices can invest directly in these funds. Instead, they may invest in smaller funds or distribution funds (funds of funds), diverting their attention from startups.

Lack of Expertise in Startups

Family offices are experts in investment but not in startups. They focus on preserving their benefactors' assets and typically invest in global stocks, bonds, or private equity funds. They lack the processes, talent, and experience to efficiently conduct due diligence and evaluate innovative markets and technology.

Misaligned Investment Horizons

VC funds typically have a ten-year lifecycle to realize returns on their investments, creating a sense of urgency for growth and exit. Family offices, however, do not face this restriction and often invest in illiquid assets, allowing them to wait out difficult market periods. This lack of urgency can lead to strategic misalignment, as VCs push for aggressive growth while family offices may prefer conservative growth over a longer time horizon.

Limited Value Add for Early-Stage Startups

Beyond capital, startups need networks, hiring help, customer acquisition support, and operational excellence. While VCs often promise these resources (though few deliver), family offices generally lack experience in witnessing successful startups grow and thus cannot provide the strategic advice needed by early-stage companies.

How to Handle Offers from Family Offices

If approached by a family office, consider these steps to protect your startup and focus:

• Engage Selectively: Only engage with family offices that have a history of investing in startups.
• Thorough Due Diligence: Conduct extra diligent background checks on any family office offering to invest.
• Investment Round Participation: Allow family offices to join an investment round, but never let them lead it.
• Board Seat Limitations: Avoid giving a family office a seat on your board of directors.
• Protective Provisions: Be wary of custom protective provisions that are uncommon in the VC industry.

Conclusion

Family offices might seem like a perfect solution for startups struggling to raise funds from angels and VCs. However, their primary focus on asset preservation, lack of startup expertise, misaligned investment horizons, and limited value add can be detrimental to early-stage companies. If you do involve a family office, ensure thorough due diligence and safeguard your startup's strategic direction by limiting their control and influence.

‍