How family offices can get more startup exposure, with Eti Lazarian and Bruce Lee | TC Disrupt 2024

Family Offices and Startups

• Family offices are a somewhat mysterious class of investors, with estimates of their numbers varying significantly, but many are interested in investing in startups. (19s)
• Startup founders are encouraged to attend conferences to meet potential investors and gain exposure to capital and ideas. Networking and being active on platforms like LinkedIn are also recommended strategies for connecting with family offices. (1m6s)
• Each family office is unique, and founders should understand that there is no one-size-fits-all approach to engaging with them. Technology is helping to bridge communication gaps, allowing founders to connect more easily with family offices. (2m16s)
• Family offices often invest in areas that complement their existing business interests, such as real estate or technology, making networking crucial for founders to find the right match. (3m3s)
• It is noted that family offices can sometimes be more emotional investors compared to other types of investors. (3m37s)
• Family offices typically invest in areas they are familiar with or care about, emphasizing the importance of personal connections and understanding the family dynamic when approaching them for investment. It is advised to focus on building a relationship rather than immediately discussing financial aspects. (3m40s)
• Family offices can add significant value to businesses they invest in, especially if the investment aligns with their existing business interests, creating opportunities for collaboration and mutual benefit. (4m38s)

Evolution and Generational Shift in Family Offices

• The evolution of family offices has seen a shift from traditional Wall Street investments to more diverse and innovative ventures, driven by the wealth created since the Great Recession and the aspirations of younger generations. (4m57s)
• The younger members of families often influence investment decisions within family offices, leading to a more dynamic and fluid investment environment. This generational shift can result in more openness to new ideas and opportunities. (6m14s)

Pitching to Family Offices

• There is a distinction between venture capital firms and family offices, with family offices potentially offering a better fit for startups that align with their interests. Founders should prepare for pitches by understanding the unique dynamics and expectations of family offices. (6m51s)
• When pitching to a family office, startup founders should adjust their approach, as they cannot simply sell a dream like they would to a venture capitalist, and instead need to provide a clear and concise pitch with a strong summary of their idea, ideally in a one-pager deck that includes all necessary information, such as the location and every tier, to help the investor make a quick decision (8m4s).
• A charismatic and strong pitch is essential, as family offices often have limited time to consider numerous pitches, and founders should be prepared to provide their information in a very short and concise manner, similar to a 30-second elevator pitch (7m37s).
• Founders should avoid using overly optimistic projections, such as growing from a negative burn to a multi-billion-dollar company in three years, as these are often unrealistic and may raise skepticism, and instead focus on demonstrating a genuine understanding of the data and the white space they are trying to capture (9m7s).
• Family offices may be a good fit for early-stage startups, but it depends on the idea and whether it complements the particular family office being approached, and founders should believe in the person and the idea to make it work (10m19s).

Venture Capital and Early-Stage Startups

• The venture capital world, including seed and incubators, has become more efficient in recent years, providing more options for startups to consider when seeking funding (10m30s).
• Founders who have spun off from a larger entrepreneurial platform and have seen the success of a startup may be more attractive to family offices, as they have experienced the process and can bring valuable insights to their new idea (9m30s).
• Family offices can adopt a portfolio approach by investing in multiple seed-stage startups, understanding that a significant percentage may fail, but successful entrepreneurs often emerge from initial failures. (10m47s)
• Seed capital investments should be smaller, and as startups progress through funding stages (A, B, C, D, E), family offices can provide strategic guidance to help them advance and potentially reach an IPO or strategic sale. (11m28s)

Advantages of Family Office Investing

• Family offices offer flexibility compared to venture capital firms, as they can provide additional funding if needed, understanding the business and working closely with entrepreneurs to achieve project goals. (11m47s)
• Family offices can leverage their intuitive insights into investments, potentially monetizing these insights into real financial gains, which is a unique advantage over institutional investors. (12m45s)
• While family offices provide personalized insights, institutions offer scalability discussions, and a combination of both can be beneficial for startups. Family offices often maintain institutional relationships to enhance their investment strategies. (13m24s)

Focus and Alignment in Family Office Investments

• Venture capital firms emphasize their extensive networks as a key value proposition, helping startups connect with the right people to advance to the next stage of growth. (14m8s)
• Family offices often focus on investments that align with their primary business interests, such as real estate, and seek startups that complement these areas. (14m48s)
• It is important for startups to find family offices that are in the same line of business to increase the chances of successful collaboration. (15m18s)

Qualities and Current Investment Climate

• Key qualities sought in entrepreneurs by family offices include being perceived as interesting, demonstrating high integrity, and having relevant experience or emotional connection to their business idea. (15m29s)
• The current environment is seen as an excellent time for young entrepreneurs to invest, despite recent economic challenges, due to the resilience and talent of emerging entrepreneurs. (16m42s)

Long-Term Vision and Patient Capital

• A significant difference between family offices and traditional investors is the timeline; family offices do not operate under the pressure of a fixed fund life cycle, allowing for a more extended investment horizon. (17m10s)
• Family offices offer evergreen capital, which means they are more patient by nature, unlike some funds that are more focused on rental capital and have to push for performance to get to the next investment (18m21s).
• This patient approach can be beneficial for incubated startups that need more time to mature, as they may not be pressured to meet unsustainable KPIs in the first few years (19m16s).
• Family offices can be a good match for young entrepreneurs who need to be incubated for a longer period, as they can provide mentorship and strategic support (19m4s).

Ecosystem Access and Social Impact

• Working with family offices can also provide access to a wider ecosystem, as even if one family is not interested in an idea, it can be pitched to others, potentially leading to new relationships and opportunities (19m34s).
• Family offices are increasingly focused on social impact investing, which is becoming a key part of their investment approach, and companies that prioritize social impact are often rewarded with higher valuations in the marketplace (20m16s).
• Studies have shown that companies that are more aware of social impact tend to have rising multiples, suggesting that being socially aware and sensitive to the environment can have a positive financial impact (20m36s).
• The traditional "crush, kill, destroy" mentality is no longer effective, and companies that prioritize social impact are more likely to succeed in the long term (20m58s).
• Family offices are increasingly focusing on aligning their investments with mutual benefits and performance, which is now considered essential in investment discussions. (21m7s)
• Unlike public companies, family offices are not accountable to public investors, allowing them to consider factors beyond immediate financial returns, such as social impact, which may take years to materialize. (21m42s)

Emotional Factors and Corporate Venture Capital

• Emotional attachment plays a significant role in investment decisions for family offices, as personal experiences can influence openness to investing in certain areas, such as healthcare. (22m53s)
• There are similarities between corporate venture capital (CVC) and family offices in terms of focusing on specific industries and complementary investments, but the differences in investment strategies between CVCs and family offices are not clearly defined. (22m17s)
• Family offices are becoming more engaged with venture capital due to the potential for impact, with the belief that if the opportunity is genuine, financial backing will follow. (23m51s)

Collaboration and Niche Sectors

• Family offices can involve multiple families in investment projects, allowing for collaborative investments in larger ventures, such as those requiring significant capital raises. (24m13s)
• The aerospace sector, particularly in hardware, is considered niche, and finding family offices interested in this area can be challenging. Engaging with space or military arenas and understanding the disruptions in these fields can be beneficial. (24m47s)
• The U.S. government's high leverage and interest payments exceeding the defense budget create a need for technological disruption in the aerospace and defense industries. This situation is compounded by other countries investing in their militaries, potentially weakening the U.S. position. (25m54s)
• To find interested parties, it is suggested to engage with infrastructure businesses and aeronautical engineering sectors, which are often located in regions like San Diego and Ohio. These areas are known for building aerospace equipment, though the processes are often antiquated and inefficient. (26m26s)

Standing Out and Seeking Investment

• For a 10-year-old Australian scale-up that is profitable and bootstrapped, standing out in a startup space dominated by pre-revenue companies can be challenging. Suggestions include creating a concise pitch book, strengthening the board with experienced advisors, and acquiring intellectual capital from experts in the field. (27m23s)
• Family offices, as opposed to venture capital firms, may offer more flexibility and fewer constraints, which can be advantageous for startups seeking investment. (28m9s)
• Family offices provide active guidance and connections to founders, which can be more personalized compared to venture capital (VC) funds. They focus on building infrastructure and relationships to ensure the success of their investments. (28m17s)
• It is important for founders to assess the level of engagement and responsibility of a family office before partnering. A family office should have a clear value proposition and not just provide financial support without active involvement. (29m32s)
• Family offices have a fiduciary responsibility to demonstrate their value to founders, ensuring that their involvement translates into meaningful contributions and growth for the startup. (30m4s)
• A successful partnership with a family office involves mutual effort, where the family office actively helps the startup grow through connections and intellectual support, fostering a long-term beneficial relationship. (30m53s)