The Reality of Family Office Fundraising

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These days, many GPs and founders reach out to me and tell me something like this:

We have been struggling with raising money from VCs after we dialed back our growth to extend our runway. So now we are looking to talk to family offices who we think are a better fit for us.

Fundraising from institutional investors has been tough because endowments and pension funds are overallocated. So for 2024 we want to expand our family office investor base where we see a lot of opportunities for fundraising.

Most people don’t have an answer to why they actually want to focus on family offices. The few who actually do have a view usually give me an answer like this:

• Family Offices have entrepreneurial backgrounds, such as owners who successfully built and sold a business. They like the idea of investing into projects that show this entrepreneurial spirit, such as start-ups or VC funds.
  

• Family Offices are not dependent on fundraising, so they are still investing freely in the current market environment.
  

• Family Offices are run by entrepreneurial founders that don’t care about numbers, but about vision and personality. They understand the struggles our business faces and are willing to take a risk in investing in us today, even if things are rough.

That is the nice way of talking about Family Offices. Unfortunately, some are less nice and think that family offices are simply “dumb money”: Inexperienced, sitting on a big pile of cash, desperate to get that money invested in flashy projects.

I think that statement is plain wrong, and the arguments above show a fundamental misunderstanding of who you are dealing with. Founders and investors who see family offices as the savior to their unsuccessful fundraising effort without properly understanding their motives and goals are setting themselves up to fail. If they don’t spend the time to learn about them, they will likely waste their time.

Let me introduce to you how Family Offices really work, and think about investing.

(What’s a Family Office, anyways? It’s probably one of the most contested definitions in finance - you can read more about it here and here.)

#1: Family Offices have entrepreneurial backgrounds, such as owners who successfully built and sold a business. They like the idea of investing into projects that show this entrepreneurial spirit, such as start-ups, or VC or PE funds.

The first part usually holds true. Outside of the occasional top-level manager or senior partner at a fund, most individuals with family-office level wealth built it through a company that they either sold or from which they draw distributions.

The second part of the sentence is more challenging to answer. “Entrepreneurial spirit” in an investment context is usually associated with risky endeavors, such as a cash-burning start-up or a first-time investment fund. However, that might not necessarily be the way an entrepreneur made their money - they could’ve also bootstrapped their business to grow it slowly or steadily (think for example the German “Mittelstand”). Or they could’ve slowly and steadily built a real estate portfolio, one small, “low-risk” purchase at a time. But even if the family faced risks on its path to success, it doesn’t mean that they want to re-experience this entrepreneurial risk in how they invest their wealth, instead preferring lower-risk investments such as bonds or real estate.

Lastly, t’s almost impossible to generalize across Family Offices - I’ve seen 80-year olds investing all of their money in venture and 30-year olds keeping their money in bonds. Not every Family Office is the right partner for a given venture.

#2: Family Offices are not dependent on fundraising (like a venture capital fund) or ongoing profits (like a strategic investor), they are the only source of capital that is still investing freely in the current market environment.

Once again, this might be true. Most people associate Family Offices with a singular large liquidity event, such as a public offering or  a sale. Depending on how long ago that exit was, they might indeed have capital ready to be invested (assuming they actually want to invest it right now - more on that below.)

Things may be different if there is still an operating business in play, which builds investable capital not through an exit but through ongoing dividends. In a good economic climate, things are fine, but today things might be very different: If the company turns unprofitable, dividends might dry up, or even worse, might require the owners to divert investable capital back into the operating business. I’m especially seeing this today from Family Offices that have a real estate or a venture capital background.

But even if there is money to be invested - the question is whether your project is the right fit. Take venture capital, for example. While every VC and founder says right now is a great time to invest, the actual investing behavior from Family Offices looks very different: From my experience, they are either overexposed from the recent years and don’t want to make new investments, or they did not invest during those years and are likely not to kick off their VC allocation during such uncertain times.

#3: Family Offices are run by entrepreneurial founders that don’t care about numbers, but about vision and personality. They understand the struggles our business faces and are willing to take a risk in investing in us today, even if things are rough.

For this argument, we can defer partly to the first question regarding the source of a family’s wealth. Assuming that they built their fortune through some entrepreneurial activity, one can assume that they have at least some understanding of what “struggle” you as a founder might be going through. 

I would disagree, however, about the point that they don’t care about numbers, and their willingness to task risk into an unproven venture. And with that, we first dive into how some founders see Family Offices as “dumb money” - and why they are wrong.

Truth is: A Family Office might move quickly if the owner finds a liking in a start-up in his industry, and especially for more entrepreneurial types, they might not care about a polished data room and a beautiful financial model. However, that disregards two very important factors at play:

First, just because the Family Office might not care about all this information, it doesn’t mean you shouldn’t make them aware of it. 

One very common issue that I see is that a founder is so desperate to raise money that they bring on a less-experienced Family Office that moves forward without ue diligence. Initially, that helps them solve the problem, as they might not run out of money for a couple more months. However, things can get very uncomfortable once that Family Office is then involved in more detail and only then sees that they might have been sold on a company that is not as well-functioning as they thought it was. 

And that’s when things get very hairy: There is a significant loss of trust, and a lot of money is at play for the Family Office. Chances are that the owner might tell his staff to do anything to get the money back. That can go from sending them to sit at your office, to uncomfortable calls with the owner, all the way to suing you. You might think, “they should’ve just done their due diligence” - and yes, that’s right, but you are certainly not setting up your company for success by bringing on inexperienced investors, especially if they’ll stay on your cap table until an exit. 

Second, entrepreneurial owners might be more founder-like - but they set up a Family Office to complement, or even balance out, their instincts. Just because someone was successful as an entrepreneur doesn’t mean that they’ll be a successful investor. However, they usually do have an impeccable instinct for good ideas in their industry as well as for the right founder personalities. 

But what they might not have - or do, but don’t want to use - are the “boring” financial skills that are also important to evaluate an investment opportunity. I remember an entrepreneur who told me that he had met an amazing founder with an amazing idea and decided after just one call to invest in their business - but didn’t bother checking that he was the only one providing money to the company, nor that they only had weeks of runway left. As a result, his small investment only helped them survive slightly further, but they ended up going out of business just a month or two after he had wired them his money. Equally, there are other such stories around other “boring” topics such as the associated legal work, where investors might provide millions but don’t have any actual control mechanisms to keep founders in check when it’s needed (i.e. when they overspend on expenses such as travel or founder salaries).

So in both of those cases, it’s where the Family Office and the Family Officers come in. Not only is it exactly their job to look out for the boring, but still important, parts of investing - but it’s also their job to balance out or even rein in its owner’s entrepreneurial instincts. When a Family Office is just set up, owners might not appreciate this or even ask their staff not to block but to realize their desired investments. However, as time goes by (and after they help them dodge a few bad investments), in almost any case, the owners appreciate their staff for it. More often than not, they become the perfect tool to say No to a friend or acquaintance looking for money, especially when the owners themselves might not want to deliver that message themselves.

So let us rephrase those prior statements:

Family Offices usually have an entrepreneurial background - but their investing strategy might be aggressively “un-entrepreneurial”.

Family Offices are not reliant on fundraising, but might still be reliant on ongoing cash inflows (i.e. dividends) and/or might be illiquid in the current environment. 

Family Offices in some cases are more willing to take risk, but might do the same level of due diligence as an institutional investor, despite their entrepreneurial background.

What To Keep In Mind When Raising Money from Family Offices

So are Family Offices the saving grace for today’s fundraising efforts of start-ups and emerging managers, who have seen institutional sources of capital dry up?

Sometimes they can be. There’s many stories of family offices as big, risk-tolerant investors that end up striking big. Here in Germany, one of the largest successes that comes to mind is Biontech, which received a first financing round of $180M (!) from two German entrepreneurs and who still own almost half of the company to this day. In my first family office job, my old boss took a big bet on car sharing company MILES Mobility when nobody else believed in the sector, and from what I can tell, it has certainly paid off for him.

But perhaps deals like those are also survivorship bias. I know many start-ups who spent months trying to raise money from Family Offices, only to end up empty-handed. So what should your takeaway be when you want to tap Family Offices as a funding source?

First, see them as a part of your fundraising strategy - not the core. While some are entrepreneurial and quick to act, an equal number is very careful and oriented towards downside protection. If you are a fund, they are likely to come in in a later close. If you raise a financing round for a start-up, they’re more likely to join once you have a lead investor.

Second, make sure that the project you are raising funds for actually fits the Family Office you are talking to. Just like VCs, who might only focus on certain industries and stages, Family Offices tend to be focused on one or multiple areas for their investing strategy. There’s many of them out there, and they manage significant amounts of capital - but across many asset classes, and not just your area of interest.

Third, know what you are getting into with a Family Office as an investor. As outlined above, bringing on a shareholder and/or anchor investor is a long-term game. Bringing in what you deem to be an easy-to-close but inexperienced Family Office might pay off over the short term, but can be problematic over the long term. Make sure to have your and their interests in mind: If your project fits their investment strategy, and they are long-term oriented, there might be fewer better and value-adding investors on your cap table than a Family Office.

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