After guiding a wide range of investors over the years from family offices to tech startups that ended up having big exits in the end, a common question that comes up is whether conventional family offices that made their fortunes in manufacturing, real estate, etc. should dabble in startups as a way to diversify their portfolio, and we have a few thoughts on that.
First and foremost, going into any startup investment has risk written all over it, and family offices looking to get into that space must realize that upfront. Additionally, it’s imperative to create a plan that’s very mutual fund-esque to weigh the pros and cons.
For example, let’s say a family office is sitting on a variety of solid, long-term investments along with $100M of dry powder, where should those funds be deployed now to produce the most favorable and durable risk adjusted returns? And startups can either become a ginormous win or an epic fail – it all depends.
Secondly, and something we always guide clients on: Though some opportunities may seem sexy on the surface, stay in your space. Many times the shiny objects are literally too good to be true.
Lastly and most importantly, if your family office has unique experience/insights in a particular space which is where your wealth came from and you see a cool new startup taking things to the next level, that knowledge/experience in itself gives you a competitive edge which is something that should be explored whether an investment is made or not. Having your finger on the pulse of what’s happening across the board is what really matters.
In conclusion, looking at the family office space broadly, it’s better to stick to your wheelhouse versus gambling on startups, though if you see something special in an early stage company and want to go on that magic carpet ride we’re here to help guide you.