Decide if you want to go direct or through a VC
When it comes to investing, there are three routes you can go down – you can run the whole process in house and invest directly into startups, you can invest through VC funds, or you can take a hybrid approach.
Investing directly has its attractions. You have control over the whole process, direct access to entrepreneurs, no fund management fees to pay, plus the chance of even higher returns. However, the amount of work involved shouldn’t be underestimated. Running the deal sourcing, due diligence and portfolio management processes requires specialist skills and expertise that most family offices don’t have, and which are expensive to acquire. It also takes time to build up a deal pipeline to ensure you’ll have good diversity of investments.
In contrast, investing via a fund enables you to hand over vetting responsibilities to a trusted third-party, while enabling you to support a wider range of businesses than you might via direct investment. If you’re starting out, this is likely to be the best approach, enabling you to build up confidence, knowledge, and networks, before starting to invest directly into startups that you like further down the line. In many cases this can be done alongside your VC fund, via co-investment deals, which mean that you can ‘double up’ by investing through the fund and with a portion of direct capital.
Most family offices opt for a hybrid approach, with research showing that on average family offices invest 46% of their venture portfolio to funds and 54% to direct investments.