Most family offices don’t invest directly in early-stage startups but the right ones can be a great source of funding

There’s been a lot of talk lately that since VCs aren’t investing in anything other than AI and angels are tapped out waiting for exits, that founders should focus their fundraising efforts on that other huge pile of cash — family offices.

I’ve seen founders adjust their fundraising strategy to target family offices, redirecting their firehose of spam and LinkedIn outreach and getting absolutely nowhere.

PwC reports that family offices are responsible for 31% of startup investments. However, more than 80% of that is through pooled investments rather than individually, and most is large checks into later stage SaaS and AI startups, the same investments as VCs, often done as co-investments with the VCs rather than an early-stage source of funding.

Are family offices a good place for early-stage startup founders to find funding? In general, no. They rarely invest in such high-risk opportunities. But there are thousands of family offices and each is unique. One might be exactly the funding source you need. But to be successful, you’ll need to know how they operate and how to target them.

What are “Family Offices?”

I’d never heard the term family office until fairly recently. Working with big companies and early startups, the family office was a world I had no connection to. So what are they?

Imagine you build a startup that went IPO. Now you’re a billionaire. You hold a lot of stock in your company, but need to be diversified with a range of different investments.

You need to invest in a variety of stocks and bonds. You’ve bought vacation homes that need care and maintenance. Maybe you have a Gulfstream or a yacht that someone needs to take care of. Taxes are a big, hairy mess. You’ve got kids and grandkids from different marriages and you know they’ll waste whatever they inherit the day you die.

Being rich is a full time job, and you’re a business leader, not a banker or accountant. Fortunately, you have money. So you hire a full-time banker to manage your money and assets for you. That’s a family office. Depending on how much you have, the family office might be staffed with one person or it might require a full team.

The family office is a separate legal entity responsible for managing a single family’s wealth. It only makes sense to employ full-time employees if the family has more than $100M in investable assets. The lesser rich have to content themselves with relying on shared wealth management services from investment banks like Goldman Sachs.

The goal of the family office is to grow and transfer wealth across generations in ways that meet the family’s requirements. About half serve the original wealth generators and half the 2nd and 3rd generation family members.

The single-family office offers privacy, customization, and tailored investment strategies. If you want to buy and sell public stocks, any investment bank will be happy to provide you with an account manager. If you want to buy and sell whole companies, you’ll need your own people.

Deloitte reports there are 8,000 family offices worldwide managing $3.1 trillion in assets, with 3,180 in North America holding $2.4 trillion. That’s a lot of money to invest. How can you grab a tiny sliver of all that cash?

Brother, Can You Spare a Million?

Frequently, the core the family’s wealth will be the public stock of whatever company made the family its fortune. The Walton family office holds a lot of Walmart stock, and perhaps Walmart corporate bonds. Same for the Disney family, Bezos Expeditions, and Ballmer Group.

Each family is unique, but capital preservation across generations is usually the first and most important goal. So the vast majority of the money tends to be invested the same way as other large pots of long-term money: treasury bills, corporate bonds, public stocks, and real estate. A small fraction is usually allocated to hedge funds, private equity, and venture capital.

There can also be non-traditional investments in whatever the family members are into: artwork, race horses, crypto… And many invest directly in private companies.

So How About Startups?

Many family offices will allocate a small amount of their investments to venture capital. However, they rarely make individual investments in startups, especially early-stage ones. Here’s why.

Think about the math. Angel groups and early-stage VCs invest in around 2% of the pitches they receive. That means they need to look through 50 pitches for every investment they make. Each one then takes weeks of work of diligence to vet the opportunity. That takes a lot of time and a lot of work, and requires a lot of experience across different technologies and industries.

The usual rule of thumb for seed-stage investments is only 1 out of 10 provides a successful return. Investing in 10 startups has a 50% of success. That’s fine for gambling, but not good enough to preserve and grow wealth. Venture investing requires a portfolio of at least 25 startups to have a reasonable expectation of a decent return.

Finding that one needle in the haystack to invest in is tough. Finding 25 is a full-time job for a team. In other words, a venture capital fund. It rarely makes sense for family offices to build their own VC fund, though there are a handful that do. In most cases, it’s better to write a check to a couple of VC funds and let them do the startup investing.

So, yes, family offices do invest in venture capital, but usually not in individual startups. But there are important exceptions that might possibly include yours.

When Do Family Offices Invest in Individual Startups?

Imagine SpaceX decides to raise another round of venture investment. They’ll go back to their existing venture investors and give them each an allocation of shares they can purchase.

If a VC can’t take their full allocation, they’ll offer the remainder to their LPs. Many family offices will jump on this opportunity to invest directly in a unicorn. The risk of the company going to zero is low and the upside potential is better than public stocks — exactly the type of investment family offices look for. But this only applies to unicorns and later-stage startups nearing IPO, not your pre-seed startup looking for a million or two to bring a new product to market.

However, there is another situation far more relevant to early-stage startups. Imagine you’re developing a solution for green steel that doesn’t require coal. If I made my wealth by building steel factories, I’m likely to be very interested in what you’re doing.

If the family made money in fashion, they’ll likely be interested in sustainable fabrics. A family from mining wealth may be interested in a new technology to find or refine lithium. If they made money in pharmaceuticals, they may be happy to talk to scientists developing new cures for cancer.

If you pitch my family office with your green steel technology, they’ll ignore it. They’re bankers, not chemical engineers or startup specialists. But if you reach out to me directly, I’ll want to hear more.

In fact, I’m on the board of the company my father founded, so the first thing I do is ask the company’s experts to take a look at your invention. They might want to do a pilot project or sign a joint development agreement.

If they’re excited, I’m excited, even if, objectively, it’s not a smart investment. A few hundred thousand out of my billion dollar pile is more like philanthropy with benefits than a serious financial investment. I’ll tell my family office manager to cut a check. In other words, it’s an angel investment facilitated through my family office.

And guess what? I have 10 colleagues in my yacht club who have their own family offices. They don’t know much about steel, but they know me. If I invest, they may chip in $100K each, too.

Similarly, my family office invested in a couple of venture funds that focus on industrial technology. If you pitch them on your green steel, the first thing they’ll do is call me and ask for my opinion. I’ll help out with their diligence process. If it looks interesting, I’ll co-invest alongside the fund.

So family offices do invest in early stage startups, but only when there’s a connection with the family. It’s best to consider this an angel investment from a rich person connected to the industry than a family office investment.

Another exception is family offices dedicated to venture investments like Winklevoss Capital Management, usually set up by founders who built their own startups or made their money running venture funds. Technically, these are family offices, but really, they’re venture funds with a single LP. Like any VC fund, they’ll have a formal process for reviewing pitches, though it never hurts to have a personal connection to the partners.

Lastly, some family offices focus on mission-based investing, putting their wealth to work doing more than making more money. These family offices may be directed to focus some of the family’s investments on ESG, climate change, feeding the world, or finding cures for cancer. Some even offer grants to deserving startups instead of writing small investment checks.

What’s the Best Strategy?

Simply pitching to generic lists of family offices is a waste of time. They are not venture funds. They don’t invest in early-stage startups unless directed to.

Think of it instead as angel investing. Find the small handful of wealthy people with a close connection to your startup and reach out directly to the family members directly, not the family office. That may be difficult without an introduction, so see how you can get connected to them.

If there are family offices with mandates to invest in your sector, find the sector expert on their team and reach out to that person, emphasizing why you’re an ideal fit for their mandate.

There is lots of money available for investment from family offices. But to be successful, you have to target the right people with the right message.

Who funded SüprDüpr, the hot startup developing teleportation? It was mostly Satoshi Nakamoto’s family office, Bitecoin Ventures. Nakamoto also took a role on the company’s board and encouraged the founder, Katie Deauville, to put aside ethical concerns and get to IPO as quickly as possible. Now the company’s Chief Elephant Officer is missing and his friend, the hacker Ted Hara, has to find him.

Read the award-winning Silicon Valley mystery novel, To Kill a Unicorn.