In a world which has woken to the need for investment in innovation and disruption, there is no shortage of wonderful ideas looking for the financial and non-financial skills and resources of partners and investors to grow.
However, it is not a space that the most significant capital market in Australia – the institutional superfunds – have participated in to any great extent. This is because the required capital contribution is typically below that which makes direct investment meaningful and, as a market, it offers a risk and return profile that doesn’t sit comfortably inside a normal portfolio structure. Having been bitten in the past with forays into VC and having been burnt by issues of lack of liquidity in the period immediately post the GFC, many are only now more cautiously assessing their opportunities.
As a market of potential funding for Australia’s next success story, Australian family offices have the potential to offer the most aligned and supportive environment to the new breed of innovators and disruptors.
Why? They are typically long term in their thinking because they are managing inter-generational wealth, are less myopic than institutional investors weighed down by benchmarks and peer comparison and, by and large, have generated their wealth from the effective management and growth of their own businesses.
In short, they offer access to patient and supportive capital, provided the interests of the entrepreneur and the investor are closely aligned.
Founders of family offices understand what it takes to build and grow an enterprise and have in many cases, established resources and networks to support the entrepreneur. They also recognise that in order to preserve wealth, the family also needs to identify new sources of growth generating rates of return beyond the market.
So how does an entrepreneur gain access to this market? For many entrepreneurs getting in a position to discuss their proposition is difficult and many fail in being able to explain what their value proposition is. The family office market is still relatively private in nature and often relies upon ‘peer’ networks and referrals before starting a conversation.
The major problem for family offices is not finding things to invest in but how to engage in early stage venture capital funding and sort the “wheat from chaff’ with a market that is swamped with accelerators and incubators, hubs and workspaces.
As the opportunities to invest are broad, the capacity to fail increases unless the family office has the relevant experience in early stage venture capital funding or the resources to identify, if they do have the relevant experience, which is the right opportunity for them.
Marrying what the entrepreneur needs and what investors like family offices are looking for are two of the key components of seeking funding, educating the investor about the stages of venture capital investment and ensuring that the entrepreneur’s proposition fits with the family office’s risk profile and internal processes.
Often family offices understand the benefits of allocating a small amount of their capital towards high risk high return ventures, but lack the conviction to put a toe in the water. Being the first to invest is not easy. At a behavioural level, great comfort is derived from peer enforcement and recommendation. Aligning your next big idea with an existing family business could bring unexpected returns.