2. The Venture Capital Landscape
The talented entrepreneurs bringing their innovations to market are at the centre of the venture capital world. Startups need access to the capital, of course, and that’s the raison d’etre of VC investing, but most startups also need mentoring and support in areas such as business development that family offices are ideally positioned to provide either through their own internal capacity or through their networks.
Investors accept the risks inherent in venture capital investments because they seek returns greater or uncorrelated to listed equities or other asset classes. Many VC investors are also driven by their desire to fund innovative solutions to societal problems. The nature of investing in early funding rounds of a startup attempting to bring an innovative new solution to market requires understanding the technology and service landscape of the industry in addition to the business prospects of the new firm. The world is not static and an extended product development cycle brings technological and market changes, increasing uncertainty. It is often repeated that 90% of startups fail. This statistic serves as a caution by highlighting the significant risk of investments being complete losses in this asset class. However, VC investing is not just about avoiding risk but identifying opportunities that many seasoned VC investors miss.
Venture investment is a competitive landscape where major VC funds with deep connections and technical expertise dominate in terms of total capital raised and deal flows. Tiger Global and Sequoia Capital stand out in this regard as does the SoftBank Vision Fund.
The factors in favour of the large VC firms maintaining their position are their brand, track record, a strong pipeline of potential new deals, significant non-monetary resources such as connections and advising, and, lastly, interest from entrepreneurs themselves.
The funding cycle bookended by the 2008 economic crisis and the covid era was marked by the incredible amount of money poured into VC. These two era-defining events unevenly impacted the VC landscape. Recent challenging macroeconomic conditions have focused attention on the potential headwinds faced in the VC space, though differentiated across business and technology sectors.
In recent decades the focus of much VC funding has been on potentially disruptive innovations. However, there are focused critiques on the limitations of VC, especially of institutional VC investors, to “advance substantial technological change” across society because of the “narrow band” of potential technology they choose to invest in. Additionally, as noted above, identifying the most disruptive firms at an early stage that will succeed is a difficult task.
Of the large VC funds, Tiger Global made waves over the past few years for the amount of capital it invested around the world and the speed at which it did so. It reportedly outsourced due diligence and inked deals in a matter of days. It is debatable if Tiger Global Management truly ate the VC world, but the difference in approach from family office VC investing is striking. Most family offices choose to allocate their resources differently than these super-funds, which brings us a discussion about what family offices bring to the VC table, what function VC investments have in a family office portfolio, and what paths family offices take to achieve their desired exposure to the asset class.