What’s Better For Family Offices Than Investing In Tech Startups?

Early investments in technology startups have become trendier for individual investors, funds, strategic corporations, and even governments.

Some have paid off well after a decade. Though what’s even better to invest in for family offices?

Patient Capital

The main difference in investing from this perspective is patient capital. This can apply to true family offices, just as too affluent families, high earning singles and couples hoping to have a family or just desiring to leave a legacy, as well as multi-family offices.

It’s a longer-term approach to investing that say day trading or flipping houses. The tech ecosystem has seized on this by trying to attract family office type investors to participate in venture capital investments. They have needed them. There are only so many individual accredited investors. Who are hammered by just about every sales pitch and anyone selling and promoting anything. Even VC and private equity funds have to get their money to invest from somewhere.

Investing in a young tech startup is something which really requires a 10-year commitment, and often taking a participating role, or getting involved in follow up rounds as the company needs more cash. This may be palatable to some family offices in some circumstances, but does it check all the boxes?

The Most Important Investment Criteria for Family Offices

These factors should be musts on your checklist for qualifying investments:

• Wealth protection, because it’s so hard to build wealth and easy to lose
• Ability to beat inflation, otherwise true returns will be net negative
• Tax advantages, because it’s how much you keep that matters
• Truly passive income and cash flow

It’s also nice to get a good multiple on your money and to grow wealth, once all of the above are taken care of. Then there is the need for low direct liability and litigation risk. The political environment out there is fast becoming unfriendly to anything not seen as an ethical investment.

Family Offices vs. Startup Investments

Family businesses can be great, but betting on today’s surging horde of startup attempts is completely different.

Today’s startup world and venture capital ecosystem are mostly based on a completely contradictory philosophy and set of values than family offices are working with. Aside from the extreme risk of failure and lack of cash flow or real assets as collateral, the whole game is different. It’s a race to raise money and cash out as the goal, not really to build a sustainable or profitable business. Once angels and VC firms have their hooks in, they are typically forcing the momentum for an exit. They aren’t very patient. There have been countless casualties, as what were good ideas and ventures are forced to act in direct opposition to their customer needs and wants, just to fatten the short term numbers. Now, you may strike it rich on the next Facebook, Google, or Uber, but those odds are getting far slimmer. We’re getting close to lottery level odds.

What about Real Estate?

Real estate has, of course, proven to be a far more profitable and reliable investment for family office like investors over the last century. It’s also true that new technologies can be advantageous to integrate into real estate as it is true that there are some types of real estate which may not be a good fit for forward-thinking family offices. Some are management intensive; others may be fading into non-existence in the next 5 to 10 years. Consider new technologies and whether we’ll need gas stations, offices, and parking lots in the next couple of decades. That’s why we are so bullish on multifamily apartments. As Jeff Bezos says, it’s far more important to think about and invest in the things which aren’t going to change. We’ll always want shelter. People will always need somewhere to live. Think about this asset class and check it against your investment criteria and goals to see if it is a match for you.