Family offices more than doubled their direct investments in startups last year to more than $120 billion, remaking the venture-capital landscape and launching a new wave of family-office funded entrepreneurs. Single family offices invested $123 billion in direct venture capital deals last year, up from $55 billion in 2020, according to a report from SVB Capital. Family offices accounted for 17% of all direct venture-capital dollar volume last year and 5% of the total number of deals — double their share from 10 years ago. The surge in deals reflects an explosion in the number and the size of family offices, and a sweeping shift in their strategies to focus more on direct investments in startups and companies. There are now more than 10,000 family offices worldwide — most created over the past decade — with over $6 trillion in assets under management. Direct investments are the fastest-growing segment of family office portfolios, as the world's wealthy seek higher returns, more control over their investments and opportunities to leverage their own start-up and business experience. In-house deal teams "Family offices are leaning in to the venture asset class," said Shailesh Sachdeva, managing director of SVB Capital's Family Office practice. "They're developing their own in-house teams to source deals, conduct due diligence and add value to the founders." The big question now is whether the growth will continue. Family office investments in startups totaled $30 billion as of July 1, well behind last year's pace, according to the SVB report, which analyzed data from Pitchbook. Family office experts say volatile stock markets, economic uncertainty, inflation and recession fears have caused many offices to pause their venture capital funding. Family offices have also seen their stock, cryptocurrency and private investment holdings decline this year, leaving them less funding venture capital, which is often the riskiest segment of their portfolios. At the same time, the drop in valuations for private companies has made venture capital more attractive. When the economy starts to stabilize, family offices will likely start pouring their excess cash into start-ups and early-stage companies at an even faster rate. "We think the momentum will start to pick up again at the end of the third quarter and in the fourth quarter," Sachdeva said. The forces driving the broader trend toward direct deals show no signs of slowing. As they balloon in size and sophistication, family offices are becoming deal powerhouses in their own right. By investing in or buying private companies directly, they avoid the hefty fees charged by private-equity and venture capital firms and other intermediaries. Many of today's family office founders made their wealth by starting and selling a business, and they want to use that expertise to help other start-ups. Younger inheritors of wealth, who are taking over their family offices, also favor direct investments, especially in tech and crypto. Family office managers say the returns from start-ups and private companies can often be higher than stocks and other publicly traded financial products. And family offices typically have longer time horizons than other large investors, so they get paid a "illiquidity premium" for staying invested for a decade or more. A recent survey by UBS of its largest family offices found that direct private equity deals grew to 13% in 2021 from 9% of their portfolios in 2019. Joe Stadler, executive vice chairman at UBS Global Wealth Management, said that share could grow to 20% over the next 5 to 10 years. "Our view is that this trend is unstoppable," he said. Stadler says the largest family offices -- especially those with $1 billion or more in assets -- are hiring their own teams of deal-makers to find deals, conduct due diligence and negotiate transactions without having to pay all the middlemen. "There is an agency problem with funds and the layers of costs," Stadler said. "They're avoiding the fees." Connecting families with families UBS, which counts many of the world's billionaires as clients, has developed strategies to connect billionaire families with each other to team up on deals and buy and sell their businesses. "By connecting, they are presenting opportunities to themselves and other like-minded billionaires," Stadler said. For entrepreneurs, family offices are quickly becoming an alternative to private equity and venture capital firms. While big venture funds usually require an "exit" or cashout within 8 years, family offices are often willing to wait longer for their payday. Along with providing capital, family office founders who started companies and sold them can also help young founders with advice and connections. Family offices typically favor technology, software, biotech and crypto start-ups. But a growing number are also investing in more prosaic sectors often overlooked by VC companies but that can still yield big returns -- food and restaurants, hotel properties, retail, transportation and logistics. Mark Ang was a college student at the University of Toronto in 2017 when he and a friend launched a storage and delivery service for bikes, canoes and other items. Their marketing budget was $500 and revenues were $5,000 a month. While advertising their service at a student fair, he met Michael Hyatt, a Canadian software entrepreneur who had built and sold several companies before founding the Hyatt Family Office . Hyatt barraged Ang with questions and quickly learned about the business. He invested $25,000 and then another $500,000. Their logistics company, called GoBolt, now does hundreds of millions of dollars in annual revenue and is in 12 cities with 17 locations, with plans to keep expanding. Ang, the CEO, won't comment on GoBolt's valuation, but deal experts say it's in the mid- to upper nine figures. Throughout that growth, Ang said he pitched several venture capital companies but always got turned down. Eventually two VC's invested, but only in later rounds. Hyatt kept investing, even in the latest round. "We had one VC say 'Well it's too early still,'" Ang said. "Four times they passed on what would now be a 75X return." Ang said Hyatt added what few VC funds can provide — constant guidance from a seasoned entrepreneur. "He has this ability to put himself in my shoes, immerse himself and give me the right advice," Ang said. "I think those kinds of family offices are more patient, they have the operating depth and they can connect the dots better than a VC, which just sees it from the boardroom." Hyatt said the investment not only generated an outsized return, but has given him an outlet for his entrepreneurial urges without the usual sacrifices. "I can put capital behind great entrepreneurs who are young and inexperienced, and I can bring experience and operation," he said. "I can help build something great, but I don't have to be 'the guy' or the CEO doing 14-hour days and being on a plane all the time. It feels really good."
