Family Office Vs Venture Capital Funding: Startup Founders Explain Benefits
- Startup founders are increasingly embracing capital from family offices over VCs and private equity.
- Family offices can provide patient capital, but it takes referrals to break into the community.
- Insider spoke to three startup founders on how they raised millions from billionaire family offices.
Sarah Brown had a choice to make. In spring 2021, she was raising capital for her British startup Pai Skincare, and considering whether a private-equity firm should lead the Series B. She founded the organic skincare brand in 2007 out of her garage with £15,000 in savings (about $30,000), and was slowly growing the business by focusing on profitability and manufacturing products in London, a costly undertaking.
“Private equity can bring more of an urgency and bias for action and pressure,” she told Insider. “We thought maybe we needed that.”
But she ultimately decided to forgo the private-equity route and have Famille C, the investment firm owned by the Courtin-Clarins family of the namesake skincare brand, lead the £6.4m (about $9 million) round.
Brown represents a growing class of founders who are embracing funding from the $6 trillion family office industry. Family offices often have longer investment horizons, putting less pressure on entrepreneurs for a successful exit. And, as in Brown’s case, these investors can be a source of advice. Famille C has guided Brown on scaling factory operations and distribution, and even interviewed a few senior management candidates for Pai. Prisca Courtin-Clarins, founder and CEO of the Famille C, and Thomas Riccobono, another family office investor, sit on Pai’s board.
“The Courtin-Clarins absolutely understand the world of beauty retail,” she said. “They built their business from a single massage table. They have a really appreciation for our commitment to formulating and manufacturing … It’s not every private equity firm’s cup of tea, sinking money into that.”
Family offices provide ‘patient capital’ that gives startups time to grow
Brown landed her first family office investor in 2017 with Pai’s £3.5 million Series A, which was led by CAP Invest. The firm belongs to the Riccobono family, which founded its namesake printing business in 1900, which gives them a long-term view towards their investments, according to Brown.
Sarah Pierson, cofounder of New York City startup Margaux, cites family offices as a source of “patient capital.” Since founding the direct-to-consumer shoe label in 2015, Pierson has raised most of Margaux’s capital from high-net-worth individuals and family offices. Margaux has raised $8 million to date.
“That kind of capital, we believe, is right for us because at the end of the day, what we’re doing is building a business, but we’re also building a brand, and building a brand takes time,” she told Insider. “I think we’ve all seen instances of consumer businesses and brands that were rushing, chasing growth and spending to grow, and they didn’t allow the time to let the brand flourish.”
Patient capital can allow startups to postpone exits or IPOs. In July, German renewables company Blue Elephant scrapped its plans to go public thanks to an investment of €75 million ($89 million) from Athos, family office of the Struengmanns, the clan behind one of the world’s biggest healthcare fortunes.
It can take years to build relationships with family offices
Though family offices are increasingly eager for direct deals, it still takes referrals to get access to the tight-knit community. Brown was introduced to CAP Invest in 2011 through a banker for Pai’s angel investment round, and met Famille C through a retail partner.
“I always say to founders, you play the long game with a lot of different potential partners,” Brown said. “We’ve talked to many people over many years, and some people courted us, but you don’t go, ‘Hey, I want to raise money’ one day and you suddenly have these first conversations.”
Founder Michael Wang raised $5 million in seed funding in September from a slew of family offices and entrepreneurs from the network he built over his 20-year finance career. Before founding Los Angeles-based Prometheus Alts, an online community for investment professionals, in 2019, he was managing partner at The Cypress Funds. Wang met many high-net-worth individuals through Robert Day, who founded Cypress in 1969 and later started famed investment firm TCW Group.
That said, it doesn’t necessarily take a strong connection to the family members themselves to get them to invest. Wang had known the heads of family offices for billionaires Barry Diller and Dennis Washington, which both invested in seed round, for years, but he has never met the media titan or the industrialist.
“That’s the case for most of the very largest family offices, or where the patriarch is a bit older,” the chief executive told Insider. “But the landscape is changing. These younger, rich people are a lot more active and do more due diligence themselves.”
Family offices led by new wealth creators are especially hands-on with startup founders
Family offices, whether founded by young tech entrepreneurs or 60-year-old skincare heirs, can take an active role with their portfolio companies. But newer firms are driving the bulk of direct deals. In 2020, 84% of single-family offices made direct investments, a report released by Fintrx said. Family offices founded after 2015 were responsible for much of this activity, as more than two-thirds made direct investments in private companies.
One of Margaux’s earliest investors, billionaire serial entrepreneur David Adelman, reaches out to founders of his 60-plus portfolio companies, held through his family office Darco Capital, on a regular basis. He has advised Pierson and her cofounder Alexa Buckley on structuring a fundraise as well as inventory financing and
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“I like the energy I get from other founders,” said Adelman, who made his fortune from private equity and student housing firm Campus Apartments.
During the early months of the pandemic, he issued lines of credit to three of his portfolio companies, including to Margaux to provide inventory financing.
“A VC can’t do that. It’s not in their mandate of their funds to debt; it’s equity only,” he said. “We don’t get every deal, but we’re building a reputation of being really user-friendly.”
Buckley told Insider that working with family offices like Darco is more straightforward than with an institutional investor.
“Given that David manages and invests his own money, it really simplifies the process for entrepreneurs, and it aligns incentives,” she said. “At the end of the day, he doesn’t have to manage competing goals.”
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