Family offices want to invest in startups
Startups are a high risk category
High risk doesn’t mean high reward
Every single day I meet some wealthy family who wants to invest in startups. They hope that over a coffee, someone will take out a list of ten soonicorns from which they will choose one or two. And then they will guide them to become unicorns. In the process, they will make 10x of their investment, get to learn the industry and keep abreast of market developments. Many of them firmly believe that they have a lot of wisdom which will help the startups to succeed.
This is the theory. Or the hypothesis which pushes them to invest.
Now come to the reality.
The first reality is that startups are looking for money without the investors gyan. The entrepreneur didn’t give up a cushy job in a global company to be reporting to some family kid with nothing better to do.
Second, most family offices actually have little to offer other than money. Most are one hit wonders themselves with little ability outside their domain.
Third and this is most important. Family offices need to ask themselves why they want to invest in startups. The chances of them making even the equivalent of bank fixed deposit rates are remote. A good answer is “I love the idea of helping young startups” . Though I haven’t ever heard this.
Which brings me to “what should family offices do in the startup sector?”.
A. They should look upon startup investing as philanthropy and not as business. When you don’t have expectations of financial return, you focus on helping rather than on earning. This also means smaller ticket sizes and more number of companies.
B. Do not invest by yourself and on your own. Invest with or through a seasoned aif fund who has been in business for at least 10-15 years. Most aif funds are happy to take on limited partners. Strike a deal with zero management fee and higher carry. Now the incentives get aligned. The fund manager will make money only if you do. Do not invest in multiple funds. Choose one you can break bread with and whose leaders you genuinely admire and trust.
C. Do not ever interfere in the working of the fund or startup that you have invested in. But be available if needed. Speak when spoken to. Answer if asked. Help if help is solicited. Do not ask funds or promoters to sign complicated agreements. Do not invest in dark pools or opaque structures like private trusts. Only invest in venture capital companies, never in venture capital trusts. In startup companies, don’t get into safe notes, convertibles or options. Buy shares simply at an agreed price per share.
D. Stay away from lawyers and accountants. Make your own decisions without getting into large excel sheets. More fiction is written in excel these days than in word. Understand that we live in a country without a working legal system. You don’t want to go to courts. Nor do you want to be taken to court. The only professional you need is a good investment banker.