Family Offices, Venture Capital And World We Seek
There is a need for innovation in business and technology, as demonstrated by the pandemic and the drive to find viable, reliable alternatives to fossil fuels. And that means venture capital – a natural destination for family offices, the author of this article argues.
This news service has written about family offices’ use of private market assets before (see example here), and their involvement in the venture capital space was also recently tracked here. As holders of “patient capital,” family offices’ time horizons make them good VC investors. However, all but the largest family offices can lack the analytical tools and resources to scrutinize VC offerings themselves, which is why some of this role is outsourced.
In a world of ultra-low official interest rates, and the squeeze to the returns of conventional assets, it is no wonder that VC is getting attention.
To consider some of the terrain is Sharon Vosmek, chief executive and founder of Astia. The Palo Alto-based group invests in women-owned companies operating in cleantech, software-as-a-service businesses, life sciences, and the internet of things sectors.
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2020 witnessed the emergence of 412 new billionaires, bringing the grand total to 3,288. Their combined wealth rose 32 per cent year-over-year to. $14.7 trillion. Since 1980, the share of the world’s wealth owned by the top 0.01 per cent has risen from 3 per cent to 8 per cent. With this increase in wealth creation and consolidation, we have also seen the rise of family offices. A concept born in the US to manage the wealth of American titans such as Morgan, Carnegie and Vanderbilt, family offices are now an investment force with over $5 trillion of estimated assets, equivalent to both France and India’s combined GDP in 2020. As the gatekeepers of not just great wealth but a family’s legacy, there is a duty for family offices to invest responsibly and with an eye toward addressing the world’s toughest challenges.
As it stands, we’re in the grips of a pandemic, an economic and climate crisis, whilst also feeding a growing population. If ever there was a moment where innovation was desperately needed it is now. And the capital investment to fuel that innovation is where family offices have a pivotal role to play.
True innovation relies on inclusion – research continues to demonstrate that inclusive teams out-innovate homogeneous teams. Despite this, venture capital – a primary source of capital for innovation – invests less than 10 per cent of total venture capital money into companies with women in positions of power and influence on the executive teams. The level of funding for Black female founders is even worse, languishing at 0.27 per cent of all funding in the US and 0.24 per cent in the UK.
A paper published in 2018 by the International Finance Corporation found strong evidence connecting increased gender diversity at the top with enhanced environmental, social, and governance standards. With this in mind, family offices should be paying attention to businesses and investments with greater diversity within their teams.
It’s important to remember how vital family office capital is in promoting innovation and solving the world’s pressing needs. When Pfizer and BioNTech announced to the world that their COVID-19 vaccine candidate was found to be more than 90 per cent effective in preventing COVID-19 in Phase 3 trial participants, our path out of the pandemic began. A lesser known fact is that a small, Munich-based family office, Athos Service, controlled BioNTech and significantly funded the company’s development. This is an important reminder of the vital role which family offices can play in funding early stage, innovative companies that can help solve real world problems.
How do you improve innovation?
We know that inclusive teams out-innovate homogeneous teams. Whilst we do not yet have the answers to many of the world’s challenges, investing in inclusive teams should be the first step.
Numerous LPs and GPs have launched specific funds to invest in diverse candidates. But the reality of these funds is that they are a mere fraction of the total capital flowing into private equity and venture capital, with more than 90 per cent invested in male-only teams. If an LP has $1 billion to invest, but only allocates $100 million to diverse managers, the disparity only goes to further reinforce and exacerbate the diversity gap.
This is where family offices can and should invest, as they have the ability to move quickly to the front line of where investment is critically needed. And, unlike institutional investors, family offices can choose to lead with their values as they seek returns and can invest in a future that builds back better for all.
With innovation, what we know is that who is not at the table is equally important as whoever is at the table. Families are in a position to provide the leadership required to make a change for the future. A change that invests in diverse and emerging fund managers – who themselves invest in diverse innovators.
There are green shoots of hope, as family offices have been taking more hands-on control over investment policy decisions as a result of continued capital market uncertainty and their desire to commit resources to making an impact in the world now and in the future. The next step needs to be for the guardians of wealth to turn their attention to investing in diverse teams that will encourage greater innovation and impact in the world, alongside strong returns.