When the financial crisis of 2008 hit and many VCs went out of business, capital available for entrepreneurs with a molecule and a dream dwindled dramatically. The surviving VCs are now much stronger yet bifurcate between early-stage, in which they start the companies, and much later-stage, in which they invest in companies with advanced clinical data and on the verge of an IPO or exit. For the investment void that has been left for the early-stage life science companies, in have stepped the family office investors as a potential rescue.
Family offices, defined for these purposes as non-institutional investors with the capacity to invest $1M or more into an individual company, have increased their commitment to the life science sector in recent years. However,the family office investors tend to lack the deal flow, due diligence capabilities, expertise in negotiating transactions and ability to properly manage and add value to companies to maximize the impact that the family office sector could have on advancing healthcare innovation and value creation. This fundamental mismatch between the companies that need capital and the capabilities of the family office investors could be addressed if better connections could be made between the two groups and if ‘institutional’ sophistication could be added to the family office investment approach. Below are our observations on how to successfully raise capital to address the inefficiencies of this burgeoning market.
- You have to build relationships before you need them. The hardest time to build relationships to secure capital is when you need it. If family office money is part of your capital raising strategy and you want to cultivate these relationships on your own, you should consider integrating yourself into that ecosystem and providing value to families before you even have an ask. Helping a family with due diligence on an opportunity will help you earn their trust such that when you do come to them with an ask, they will be more inclined to invest. Attending family office conferences or hiring a connector (contact me for any recommendations) can improve your ability to meet families.
- Persuade trusted advisors. Everyone has trusted advisors, especially really successful people. Many have Chief Investment Officers and others have multi-family offices that manage their investments, among other things. Estate planning attorneys, accountants and confidants also have access to the decision-makers. Networking directly with families with an interest in life sciences is primary in importance but getting to their influencers can help you get a meeting with them and convince them to make an investment.
- Explain your company at the appropriate level. Family office investors are neither stupid or unsophisticated. They might not, however, have a deep understanding of the life science space. Make sure to treat them with respect and speak intelligently to them as they are very savvy people. Try not to use jargon or at least define it when used. You might need to explain more than once and educate the investor on the basics of the industry. Do not assume that they will understand your data; if they do not understand, they will not invest.
- Hold their hands through diligence. Unlike a typical venture capital financing where fairly standard due diligence questions are asked, family office investors might have specific idiosyncrasies or questions that are important to them. Facilitating their due diligence is important; for example, putting them in touch with relevant experts who are not affiliated with the company will go a long way to earn their trust. They might not come in on this round but by building that credibility in diligence and laying out the true risks, they might want to invest at a later date.
- Follow-up. Families do not usually have a need to deploy a certain amount of capital by a certain date. Often they take longer to make decisions and might not always come to what you think is a rational conclusion. Respectful yet persistent follow-up is required to make sure they are staying on track. Respect their personal time and space but just know that you job is to convince them to invest. Sometimes that means pushing harder and other times pushing less.
This space is still the wild west in many ways. It is hard to find interested families and understand their investment decision-making. That said, any CEO that can successfully crack this code and attract family office investment can become enormously successful and control their company’s destiny much better than they would be able to with a venture-backed company due to the potential misalignment around time horizons and value creation strategies that venture boards and management teams often encounter. If you are a company backed by family offices, I’d appreciate hearing from you to learn from your experience. Please drop me a note at geoff@locustwalk.com.
Written by Geoff Meyerson