The Role of Family Offices in the Venture Ecosystem

At the end of 2021, First Republic Bank and Kauffman Fellows surveyed family offices across the United States and globally to get a better understanding of their investment strategies, primarily how they invest in VC funds and make co-investments.

Family offices play a large role as limited partners (LPs) in first-time, emerging, and established venture capital (VC) funds. In addition, as they’ve gained experience and become more sophisticated, family offices have become active co-investors alongside VC funds, as well as direct investors of startup companies.

Venture capital is booming. U.S. investment at year-end 2021 reached $329.6 billion, an all-time high that nearly doubled 2020’s record level, according to PitchBook (see chart). Similarly, 2021 fundraising hit $128.3 billion — a nearly 50% increase over the 2020 record. Driving investor interest is the potential to capture outsized returns and participate in million-dollar-plus “unicorn” companies that follow trillion-dollar market cap VC-backed companies such as Apple, Amazon, Google, and Microsoft.

Today, family offices join a growing number of nontraditional venture investors, including hedge and mutual funds, sovereign wealth funds, pension funds, and private equity investors. (See First Republic’s Private Equity Swims Toward Late-Stage Venture Targets.) Each of these investors brings a different set of investing skill sets, venture experience, and motivations.

The 2022 family office report summarizes our findings and includes commentary from Kauffman Fellows, select family offices, and venture managers. Some of the key takeaways:

• Venture investing is a mainstream practice for family offices, with the vast majority of those surveyed investing in established, emerging, first-time and diverse managers.
• When investing in established venture funds, family offices ranked deal flow and sourcing as the chief pain points, while for emerging managers, a manager’s track record and credibility are the critical areas of focus.
• Co-investing alongside a fund manager is a widespread investing strategy, yet only a minority of family offices surveyed had the in-house resources to review and monitor these investments.

To learn more, download the full report!

The vast majority of family offices allocate capital to venture funds — including riskier first-time funds.

Family offices are well suited to invest in startup companies given their entrepreneurial culture and heritage as well as their focus on husbanding family wealth across generations. Thus, it isn’t surprising that nearly 90% of the family offices surveyed allocate capital to VC funds.

The vast majority (72%) of those surveyed invest in established venture funds, 84% invest in emerging venture funds (which include Fund II and Fund 3) and 81% percent invest in first-time funds — a jump from over 75% last year.

“Many family offices are adding rigor and focus to their venture capital strategies. One trend is to combine a fund-of-funds approach — investing in a basket of both established and new managers — with a direct investment approach aimed at growth rounds in a fund manager’s existing deals. This combination strategy allows family offices to get broad exposure and double down on opportunities they really like, often with lower fees and risk.”

— Gale Wilkinson, Founder and Managing Partner, Vitalize Venture Capital (Kauffman Fellows Class 23)

Family offices are exposed to distinct pain points when investing in established vs. emerging venture funds.

When investing in established venture funds, the surveyed family offices ranked deal flow and sourcing as the chief pain points. An established VC’s track record and size of fund ranked as secondary concerns.

Reflecting different perceived risks when investing in emerging managers, the surveyed family offices indicated that a venture manager’s track record and credibility are the most important pain points. An emerging manager’s deal flow, sourcing, and diligence are secondary.

“Not every family office will have access to the Andreessens and Sequoias of the world. But that doesn’t mean they can’t have a successful venture program. Every top-tier firm started as an emerging manager. Betting on a relatively new GP allows you to develop a relationship with the team that you’d never have in a large mega fund. Ultimately, that could allow you to grow with the firm’s success, give you access to coinvestment opportunities or simply enhance your knowledge of specific verticals.”

— Steven Tsao, Vice President, Miven (Kauffman Fellows Class 24)

Co-investment continues to be an important strategy for putting more capital to work, but few family offices have in-house expertise.

As they’ve gained experience investing in venture funds, family offices have shifted to investing alongside a fund manager. According to our survey, 82% of the surveyed family offices co-invest.

Co-investing has important benefits: It lowers the cost of investing with a manager and enables more capital to be put to work. But it generally entails more work for the family office (e.g., evaluating and monitoring deals).

Only 35% of those surveyed had the in-house resources to review and monitor co-investments, with the majority relying on the venture fund manager or outside experts.

Family offices tend to write relatively small co-invest checks, with over 75% of those surveyed making co-investments of less than $1 million

To learn more about family offices’ average commitment size, target sectors, sourcing methods, and more download the full report. Thank you First Republic Bank and all who participated.