Family Office

Stop Looking For Unicorns - Time For A More Disciplined Approach To Venture Capital?

Tom Burroughes, Group Editor, July 24, 2017

articleimage

A family office organization that is particularly enamored of venture capital talks about the need to focus on results and not being bedazzled by the flashiest deals.

A hot topic at present is the enthusiasm seen among family offices for direct investing and private capital markets, such as venture capital. But there is a need for firms to have a disciplined focus on results, rather than chasing the most exciting-looking deals, industry figures say.

VC is far from being a small niche any more. A study in July 2016 by Concentric, a technology investment partnership, based around interviews with more than 300 family offices around the world, found that 70 per cent of them were actively investing or looking into VC. Of those, around 30 per cent were set up with a team and a strategy to manage in-house investments, while another 30 per cent outsourced the activities to third-party managers and the remaining 40 per cent operated with a hybrid model. The study points out that the family office love affair with VC is not new: some of the oldest venture firms were essentially developed as the direct investment arms of wealthy families, such as Bessemer Ventures, originally an outgrowth of the Bessemer Trust established by the Phipps family, or Venrock which was originally an outgrowth of the Rockefeller dynasty.

Evidence suggests that a considerable number of family offices set their aims high when it comes to returns from public and private markets, which might suggest they hope VC and private equity can be stellar performers. Single-family offices, for example, typically have an annual targeted rate of return of 13 per cent and MFOs seek 1.3 per cent, according to a survey last year by Peltz International, a New York City-based research group. (Source: Family Capital, June 1, 2016).

There is certainly plenty of money seeking an investment in VC – which raises the question of investment “overcrowding”. Capital available to venture capital fund managers has risen in H1 2017 to a record $176 billion, according to Preqin, a research firm tracking alternative assets. Recent VC performance data shows a mixed picture. Some of the poorest performing funds for vintages 2000-2003 are focused on North America but the region has seen stronger performance from more recent vintages, especially 2009-2011. Other figures show that love for VC is strong. In the US last year, VC funds raised $40.6 billion and it was the largest year for VC fundraising since 2000 when the venture industry pulled in $101.4 billion (source: Techcrunch).

Against that backdrop, maybe there is a need for family offices to take stock of what's achieveable and seek firms not often considered VC material.

It is understandable to chase after the highest-possible returns from the “next big thing” but solid gains from less eye-catching areas shouldn’t be spurned, according to a US-based family office with a focus on venture capital.

In many cases, investors are not encouraged to look at venture deals unless the rewards shoot the lights out, Nick Lewin, founder of US-based family office Crown Predator, told this news service recently.

“If you are all hot and excited about what venture capitalists do, you should be running a VC firm, not running a family office,” he said.

“What really interests me is all the stuff where you can make two, three or four times your money….but that’s not considered exciting,” Lewin said. He gives the example of how, in 2015, Crown Predator invested into a medical devices firm making breast implants (Establishment Labs) and got involved in a company and sector spurned by venture investors. Another example is Halo Maritime Defense Systems, a company that puts security around warships in harbors - crucial issues at a time of heightened concerns about terrorism.

Defense is, in fact, a sector almost entirely off the VC sector radar apart from cyber security, Lewin said. Because of this fact, a lot of VC firms just don’t consider defense a sector worth their time, he continued. This is the kind of area he likes: non-obvious, with challenges that make it difficult for venture investors to play in, and therefore potentially full of undiscovered gems.

Crown Predator, which is about a decade old, seeks to provide strategic growth capital. It does not engage in providing capital from pure ideas drawn up on a sheet of paper and it is not so much focused on snazzy technology as it is areas where instutitional capital has stayed away. Crown Predator has found these investments in sectors as diverse as biotech and healthcare, energy, media, security, sports and technology.

Lewin, whose family is the genesis behind Crown Predator,said his organization co-invests on deals with other family offices, cutting checks on amounts from $10 to $30 million in total. The willingness to work with other offices means there is a need to have a strong investment discipline so other FOs will participate on a deal as well. Also, having other FOs allows the freedom and flexibility to consider specific investments that are larger, more bureaucratic or short-term investors shun, Lewin said.

As far as his own background goes, Lewin has been a private investor since 2000. Alongside him at Crown Predator is Justin Kamm, who previously served as a board member of Establishment Labs, and as a board member and chief operating officer of the AVP Pro Beach Volleyball Tour. Kamm also works actively with management teams of portfolio companies to grow their businesses. He joined Crown Predator in 2007. A third senior figure is a man with a motor racing pedigree: Brian Vickers. Vickers has raced in the NASCAR Sprint Cup Series since 2003. A former NASCAR Xfinity Series Champion, Vickers has also invested in a wide range of sectors.

Shakeout ahead?
There has certainly been a buzz among high net worth investors, private client advisors and family offices around private capital and direct investing. Preqin's data, show significant inflows. Overall private equity fundraising reached $121 billion for the quarter and this pace puts 2017 on course to break 2007’s annual fundraising record, and with several potentially record-breaking funds in market, it looks as though momentum may be sustained into H2, Preqin said.

Crown Predator's Lewin appears to have academic evidence in support of his claim that too many people are chasing the big numbers in VC and not taking a more humble approach. According to a study as far back as 2001, in the shadow of the dotcom boom's bust, John Cochrane, resesarch associate at the National Bureau of Economic Research, stated that VC investments carry more risk than most investments in the broad public market and their returns are much more modest than commonly thought. He concluded that VC investments are not dramatically different from publicly listed small growth stocks. (That study was called The Risk and Return of Venture Capital.)

Register for FamilyWealthReport today

Gain access to regular and exclusive research on the global wealth management sector along with the opportunity to attend industry events such as exclusive invites to Breakfast Briefings and Summits in the major wealth management centres and industry leading awards programmes