As an early advocate for the importance of the family office in the biotech financing landscape, I have learned from recent experience what many entrepreneurs already know. Raising money from family offices is hard. While there are several challenges to attracting family office investments, Locust Walk has established a practice in connecting capital-seeking life science companies with potential family office investors.
I started working in the family offices ecosystem summer 2014 before most people hadn’t even heard about the term. John Hallinan at MassBio and I put together the first Family Office Bioforum event in Cambridge, MA. Around 50 family offices attended with no service providers, companies or even institutional investors invited. The event was for families to get to know each other and to learn about direct investments into the life sciences. By all accounts it was very successful. We have since put together an additional four Family Office Bioforum events in Boca Raton, FL in the winter and Cambridge in the fall. From these events and helping to raise capital in the space, I’ve learned several important lessons about the challenges of family office capital raising that I wanted to share.
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Most families do not invest in biotech/medtech
The majority of families that I’ve met who even make direct investments like to invest primarily in real estate and secondarily private equity in companies with EBITDA. I’ve heard a reputable source state that approximately 5-10% of family offices will consider investing in biotech/medtech. Later stage investments typically are met more favorably that earlier stage in this cohort of investors. Interestingly, I’ve met many families who will write 8 or 9 figure checks to research hospitals but will not invest anything in the startups that come from the innovation that they fund.
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Each family has a very different remit
For the families that do invest in the sector, each has a very different objective for their investments and a different means of making investment decisions. Most families that make investments like to invest with other families. Many have had bad experience investing alongside traditional venture capitalists and often avoid such situations. The differences in philosophy as to time to exit, patience with the management team and ability to invest follow-on capital create tensions that are often hard to bridge. Not surprisingly, many families have specific therapeutic area or disease interests based upon family members with those diseases. Learning in advance those interests is often not easy.
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Families do not need to make investments
For families with significant wealth who are looking to preserve it for generations to come, most do not need to deploy the capital. When they do invest, they do so very painstakingly. Often the investment comes down to a people decision rather than a decision about the merits of the technology. As such, the timelines for companies who need capital often get drawn out if they don’t start the fundraising process early enough.
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Less institutionalized families typically are more tire kickers than those with professional staff in house
There are several family offices with highly sophisticated teams either led by the family member with relevant experience or via hiring people who have worked at other funds. These family offices often co-invest with traditional venture capital firms and are also willing to go it alone. Decisions are typically faster with these groups. Too often families without the experience in house often rely on family offices with experience to make decisions and will not move until someone they trust also invests.
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Earning trust is very hard
When investment decisions are based on relationships either with lead investors or management teams, it is very hard to not just get to these families but convince them to invest if you don’t have one of those relationships already in place. Relationships are a proxy for due diligence in many cases and are not built overnight. Often the relationships take years or decades to solidify, which most companies do not have that kind of time.
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Almost everyone is a connector posing as a family office
Probably the most frustrating part of this ecosystem is the number of people who are trying to make a living selling to these families and introducing deals to them. When you are introduced to a large family office, only to find the professional at that office is a capital raiser in his/her spare time, you often don’t know if you are meeting with a decision maker, facilitator for the family or a connector who will want to be paid on the capital they introduce.
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Getting to the decision maker is often difficult
Unless you are introduced by a close confidant of the family member, getting an audience with the decision maker is very difficult. The system they setup is intentionally meant to screen and block only but the most promising situations. What ends up happening is that the company has to sell multiple layers of advisors and professionals before getting to the decision maker.
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Most families want to remain anonymous
How do you find a ghost who wants to remain invisible? Getting connected to people without a website, LinkedIn presence or much on Google is difficult. People are pitching these families all the time so their privacy is very important to them.
Not all is gloom and doom and despite these challenges, there still remains a very attractive opportunity for companies to raise money from family offices if they can navigate the complex nuances of this deep-pocketed pool of capital. In a future post, I will write about how to overcome of these issues. In the meantime, if you are interested in discussing this topic further, please reach out to me @ geoff@locustwalk.com
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