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Over the last decade, SVB has observed a steady rise in the role of family offices in the broader innovation ecosystem. While family offices helped seed the first VCs in Silicon Valley decades ago and more recently supported a growing, diverse pool of emerging managers, families are striking out in new ways. Their investing strategies are increasingly more sophisticated and, in some cases, beginning to resemble traditional venture funds in both form and function.
Several factors are driving family offices’ more “professional” approach to venture investing: the current wave of innovation, the abundance of capital driving value creation from public to private markets, interest from next-gen family members, general fee aversion and a possible strategic alignment with a family’s operating business.
Mirroring the entire VC ecosystem, 2018 was a banner year for family office investment, with record levels of capital allocated across fewer deals. Total US-based direct investments with at least one family office participant nearly tripled from $5 billion in 2017 to $13 billion in 2018. The median late-stage deal size doubled from $25 million to $50 million, and through the first five months of 2019, the median deal size was nearly $45 million. While still dwarfed by the late stage, the median value of early-stage deals that include at least one family office has risen to $16 million through the first five months of 2019—compared with $8 million in 2018—providing crucial funding for young companies.
Family offices are professionalizing
Behind this growth in family office capital supporting innovation is a group of professional investors seeking more intimacy in the way they invest. About 45% of family offices surveyed in 2018 by UBS’s Global Family Office Report said they plan to do more direct investing. This requires a higher degree of sophistication, including building in-house venture teams to identify and evaluate portfolio targets and refine sector focus, allowing families to filter potential investment opportunities.
SVB’s Family Office Practice engages with families building $100 million+ venture portfolios, often with a focus on specific sectors including fintech, healthcare, impact or consumer-related ventures. In some cases, families are filling niches not well aligned with traditional venture. Many families have focused on investments that have a strategic tie to the original business that generated the family wealth. In this way, they are naturally specialized.
Ganot Capital is a family office with more than 50 years of investment and operational experience in healthcare. In 1964, the principal began developing hospitals, nursing homes and related assets and now focuses on post-acute care. All venture, growth and buyout work led by the family office ties back to its core competency in healthcare and the team’s ability to identify strategic alignment between a potential investment and the family’s senior care-related activities.
"Our VC investments in technology -- ranging from using AI to analyze post-acute patient data to improve outcomes to an FDA-approved device to monitor AMD patients at home -- all benefit from our deep understanding of the post-acute senior healthcare market," noted Guy Katsav, managing director at Ganot Capital.
Family offices raising outside capital
In addition to investing their own pools of venture capital directly into companies, families around the world are seeding local venture ecosystems and beginning to raise external capital. In many cases, these families are seen as trusted partners for other global families looking to replicate the success they’ve had in professionalizing their venture efforts. We’ve seen this trend emerge outside of Silicon Valley in Denmark, China, Dubai and elsewhere in the US.
Based in Provo, Utah, the Hall Family Office has been engaged in technology and innovation for over 60 years. The principal's initial success as part of the team that invented the synthetic diamond in the mid-50s soon spilled over into innovation beyond materials science. They now call a 130-acre campus home, employing over 700 people in 650,000 square feet of real estate located in one of the country’s top three Opportunity Zones. “Hall Labs Innovation Campus” houses more than 25 companies active in multiple sectors spanning seed to growth stage.
The Hall Family Office recently announced that it is transitioning to a new phase and opening a fund to external investors for the first time in its 64- year history. Opportunity Fund 1 ($100 million target with a $1 million minimum investment) focuses on select Hall Labs Innovation Campus companies and Utah technology businesses in a tax-advantaged vehicle to invest in impact, venture and growth-stage companies. The initial targets leverage the infrastructure, experience and execution of the Hall Family and the Hall Labs Innovation Campus.
“As other funds have been scrambling to figure out how to navigate the regulations, raise capital and source narrow-scoped investment opportunities, we are incredibly fortunate to be already working with a portfolio of 20-plus companies in one of the country’s top three Opportunity Zones,” said Matt Van Dyke, managing partner of Hall Venture Partners. “Hall Labs is providing the fund a systematic process to incubate and grow innovative technology and ESG companies for fund consideration.” Van Dyke added that each company must meet specific investment criteria, including a strong return profile in addition to meeting Opportunity Zone compliance: “The ability for these companies to receive investment and grow within the designated zone makes the opportunity very compelling.”
With a proven process that leverages the experience of the Hall Family, the right location and purpose-built opportunities, the HVP team is well placed to enter the next phase of professionalization as they open up to outside capital.
The next wave of venture
In the last decade, the family offices have emerged as a significant source of capital fueling innovation globally. A minority has morphed into serious direct investors as these offices seek to capture a larger share of the appreciation that has relocated from public to private markets. As they gain experience, we expect newly “professionalized” family office investors to emerge, collaborating and syndicating with like-minded investors and providing a differentiated pool of capital for founders.