When tackling Family Offices (FOs) subject, we tend to recall repeatedly that each family is unique and as such that their modus operandi is also very distinctive.
However, in terms of investment, apart from major FO such as ICONIQ – backed by the Zuckerberg and Sandberg families – who excels in the Venture Capital (VC) industry investment (Insight Venture Capital fund), VC remains a complex universe for many FOs.
Would this consideration be caused by their family specificities or by the antinomic DNA between FO and VC investment?
To clarify this point, Wealth Monaco interviewed Dr. Alexander Kern, founder of AKX Capital in Monaco and the Managing Partner of the Euro -Institute. He is a Venture Capitalist, investor and professor at the International University of Monaco (IUM) and EDHEC.
From old money to new-age technology affluence
The unprecedent turbulence and challenges stemming from COVID-19 created a new worldwide economic situation, which led investors to spot original investment opportunities that could have still high returns with a solid downside protection. These needs got successfully satisfied by the VC industry. An asset class that has become more attractive and considered as a great investment opportunity.
While traditional institution are still big investors to the VC funds, they used to be reluctant towards this industry. This tendency is also altering as portfolio managers grew up with the new-age technologies, or been involved in Big Tech companies, and maintain ever since an entrepreneur mindset. Their success models are the Elon Musk, or the GAFAs leaders, and they tend to invest with an entrepreneurial thinking by directly approaching start-ups’ founders.
In the same time, many institutional investors, pension funds or FOs have experimented a generation shift since the past three or five years, which will become even more significant in the next five to ten years, as the “patriarchs” are getting older and leave their FO or their business to the next generation – digital natives who are “almost constantly” online.
In Monaco FOs and HNWIs are the main investors into this innovative asset class. However, by nature, FOs are willing to remain confidential and secretive, so when contact is directly made to them by a startup, FOs may not have all the needful indication on previous failed capital raising attempts made by the startup founder to other Angel Investors or famous VC funds, who did not invest in them for some good reason. This might leave FOs with only the “left overs”.
Hence, FOs need to approach this asset class in a smarter manner.
How FO should approach VC industry?
Would best option for FO be to integrate their own VC team, or approach VC Funds?
Majority of Family Office do not have dedicated investors manager or staff, trained on entrepreneurship problematics of VC, so their analyse from a traditional private equity point of view may not fit to the VC investment world.
A dedicated venture team can be a great option for a FO with a high expertise in a certain region or sector of industry. For less specialized families, they may consider to integrate a team to deal with the ventures’ opportunities, but in such as case, the fix charges they will have to allocate for this team will not be proportional to the startups’ expected return.
To cover the average charges of a venture team, FO could easily spend 500K$ per annum, meaning that they would have to invest roughly $10 – 20 millions each year in VC, which represents a far too high level of investment for this specific asset class to most of the FO.
For this reason, FO are also looking at investing in VC funds but many of them are typically oversubscribed by other FO or institutional investors standing behind those funds since their inception; that is the case for i.e. Sequoia, Andreessen Horowitz, or Benchmark Capital which have funded the most famous start-ups such as Facebook, Uber or WeWork and may not need new comers in their VC funds.
Therefore, FO who want to enter the VC world should rather invest in a fund of funds (FOF). Main reason is that the manager of this fund of funds has the full scope of VC industry, and the expertise of specific sector, industry or regions that are the key factor of success to VC.
This solution gives FOs both the accessibility to enter a VC fund and the potential of having higher returns thanks to a large panel of selected startups, which consequently implies a greater probability of finding at least one unicorn that will potentially boost the returns.
To conclude, beyond the complex approach of VC, it seems nevertheless likely that the footprint of FO within this sphere will continue to grow in the future years.
Some FOs may choose to invest in early-stage startups, in order to limit the risks from creation to early development, while others may instead prefer to diversify by investing in early-stage startups that represents a low volatility option for Growth At a Reasonable Price (GARP) – where GARP investors look for companies with a regular growth return above the average market level (investment growth) while excluding companies that are too well valued (investment value).
Anyway, despite the contrasting investment and post-investment styles between FOs and VC firms, it is possible for FOs to find in the VC industry their own vision of investment as a high value creation in the long term. And to go even further than this idea, VC industry could highly gain from collaborating with FOs, whose governance and conviction criteria are extraordinarily strong.
Interview of Dr. Alexander Kern, founder of AKX Capital and the Managing Partner of the Euro -Institute / Article: Joana Foglia