Why Family Offices Are Investing in Early-Stage Tech

Our world’s rapid innovation has led family offices to rethink their investment strategies to more actively participate in the global tech transformation. In an effort to manage portfolio diversification and support world-changing technology, family offices are investing heavily in early-stage tech startups.

Family offices play a significant role in startup investments, accounting for nearly one-third of all capital invested in startups worldwide. Early-stage tech investments make up a substantial portion of these deals for many reasons. Here’s why family offices invest in early-stage tech – and why your family office may want to consider it, too.

Portfolio Diversification

Portfolio diversification is an important part of asset allocation that involves investing in various asset classes to hedge against volatile markets. By investing in various asset classes, it prevents a portfolio from reacting in unison to market conditions. With so much wealth at stake, portfolio diversification is critical to a sound family office investment strategy.

Family office portfolios include a range of traditional assets such as real estate, hedge funds, private equity, stocks, bonds, and retirement accounts. But, if they’re paying attention to the investment space, they know that startups – and particularly tech startups – can be a significant source of innovation and growth. Adding burgeoning tech to the portfolio mix diversifies their assets even further.

According to Goldman Sachs’ 2023 Family Office Investment Insight Report, alternatives remain a major focus for family offices. Venture Capital investments are seen at 7%, under the broader category of alternative assets, which sits at around 44% of the total portfolio. This is compared to the typical ultra-high net worth individuals who typically allocate around 20-25% of their portfolio to alternatives depending on their risk tolerance. This speaks to family offices’ return hurdles, sophistication, and multi-generational investment horizons, along with the higher potential returns available through private markets. It may also forecast the increasing role family offices will have as limited partners in new fund raises and as potential direct co-investors in attractive private investment opportunities.

The tech sector has shown strong growth in recent years (especially after COVID-19 forced a wave of digital transformation) and is expected to continue expanding in the future as more of our world becomes powered by technology.

Early-stage startups are also generally less affected by market cycles. Some are even launched in these conditions. They’re created to be adaptable and resilient in order to thrive in the face of downturns and evolving market conditions. Investing money in these tech companies can help family office portfolios weather turbulent markets and find continued portfolio growth. Taking a risk when a market is down and investing in this market should result in great returns.

Path to Support New Tech

Family offices are supportive of technology and financial innovation by nature – they rely on it themselves to see continued success in the management of their wealth. They have a unique perspective as an entity that benefits directly from tech innovation, so it’s natural for family offices to support new tech, especially tech that supports family operating companies.

They know that startups offer the greatest potential for impact in the world, and the lower ticket size of early-stage tech investments makes them more accessible than the path to invest in larger, established companies. By contributing to brilliant ideas through their investment strategy, family offices can foster greater innovation.

Family offices are likely to invest in sectors where family members may have experience or passion, though investments span all sectors. The top verticals for family office-backed startup investments include SaaS, FinTech, AI, and machine learning, illustrating just how focused family offices are on tech-specific investments.

Changing of the Guard

As the average family office becomes more professionalized over generations of accumulated wealth, it evolves into a professional family investment fund. The next vanguard of family office leaders is taking the reins, assuming leadership roles, and taking decisions into their own hands.

This younger generation grew up more familiar with technology, so it’s more comfortable with technology and investing in it than previous ones. VC investments allow you to get involved on the front end of industry innovation, giving family offices greater potential to make a lasting mark, culminating in secured wealth for future generations.

Exited Founders Creating Family Offices

The type of families creating family offices is also shifting, leading to more attention on early-stage tech. As exited tech founders look for a place to put some of their newfound cash to work, they often create family offices to use their earned capital for promising new opportunities. The founder-turned-investor is much more comfortable investing in an early-stage tech company than someone who is solely an investor because they have been on the other side (and already cashed out from it).

Former tech founders want to stay in the game long after an exit. By switching to the other side of the deal as an investor, they can continue to flex their genius and surround themselves with peers driven by similar goals who live a similar lifestyle.

These tech-founder-led family offices also recognize the invaluable guidance, perspective, and network access they can provide tech investment companies, offering learnings from their own experience and creating connections with previous contacts to accelerate the startup’s growth. In this way, family offices compete with some of the notable advantages of angel investor funding – but they often have deeper pockets and prefer a more passive approach.

Investing in Technology as a Family Office, the Right Way

My good friend and colleague David Sachse, founder of FamilyVC, often discusses how families can be more effective and successful investing in VC and early-stage tech companies.

First off, Dave recommends working with funds you know and trust. Working in VC is more about who you know than what you know. As a family office, you are typically on the outside looking in, so find a VC you know and trust and try to work hand in hand with them.

Here are some other tactics that Dave recommends to ensure success as a family office investor in VC:

💸 Understanding that capital is a commodity
⏳Having someone on your team whose full-time role is VC investing
🌐Relying on more than just your existing network for VC deal flow
📈Taking a portfolio approach, not randomly investing in one-off deals.

The Evolving Focus of the Family Office

As the tech industry grows, family offices will play an increasingly important role in its development. Family offices have capital and often bring experience from the entrepreneurial side, making them well-positioned to make early-stage tech investments. Family offices also need portfolio diversification, which early-stage startups uniquely provide.

Family offices and early-stage tech – they’re an ideal fit for one another, driving innovation on both ends for the betterment of our world.

Reach out to learn how your family office can make an impact by investing in early-stage tech and how other families are working with Florida Funders to be great venture investors.

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