What Family Offices Should Look for in a Venture Capital Growth Fund

You know the old business advice, “Find a hole and fill it”, right? Brian Smiga, co-founder and managing partner with Alpha Partners, knows of “a $20-billion-per-year hole,” and he has a potentially lucrative way for clients to fill it: pre-IPO private technology investing.

“A lot of families would like to be involved in the private technology investing world,” begins Smiga. “They know that if they don’t participate, they are leaving money on the table. However, they may also know that 70% of all start-ups fail between years two through five and 75% of venture-backed companies never return cash to investors.”

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Smiga goes on to add, “Some family offices who have tried it have gotten kicked in the teeth. They may want to get back in, but they’re looking for a safer way to get into private technology investing.”

His answer is, your clients may find that their best strategy is to invest in venture capital growth funds. He particularly recommends the smaller growth funds.

Venture Capital Growth Funds

What he means by “smaller venture capital growth funds” are those with less than a $1 billion under management. In his view, these create an outsize return.

 “Out of the roughly 2,000 venture capital firms today managing a combined $548 billion assets under management, 1,300 have less than $100 million in assets under management. And yet, 8 out of 10 unicorns in the last 10 years have come from these smaller funds. The venture growth funds then cherry-pick the best of these companies at the middle stage rounds, like Series B, C and D when the companies have established leadership and fundamentals.”

How Do You Get In?

There are many venture funds.  How does Smiga recommend you choose among them? His suggestions are:

1. Do a Google search on venture growth funds with less than a billion dollars under management. “These regularly outperform the larger funds,” he states.
2. Look for ones that align with your expertise.  Are you in agriculture? Social media? Education? Medicine?  Pharma? “Pick a venture fund where you know the terrain. You want to invest in things that you understand. You’ll also find that in the act of partnering with a VC fund, they’re likely to provide you with priceless networking opportunities to deals, and with other experts with similar interests.”
3. Pick ones that are geographically convenient for you. “If you live in an area away from the big investment centers, you can add a lot of value to the fund because the VC is likely to value the additional connections you can offer.”
4. Understand your risk tolerance and time horizon. Funds investing in pre-seed – Series A companies tend to have a model that invests in many companies with the understanding that one or two investments will return 50x – 100x. Oftentimes, these funds also take 10+ years to return capital. On the other hand, later stage growth funds, similar to Alpha Partners, look to deliver a consistent track record of return of capital over a shorter time horizon. These funds look for investments that return between 5x – 10x over a 5-year timeframe.
5. Choose VC firms that allow you to partner with them and to co-invest with them through SPVs. “This can be highly profitable, when you’ve chosen the right ones. Typical returns are greater than 20% IRR.”
6. Research and interview several funds. “If it were my money, I would study and interview at least twenty VC firms, and then I’d pick two to invest in, after much diligence.”

Smiga has an additional reason to like VC growth funds. “They can make money for you, but at the same time, they are making the world a better place. To take Alpha as an example, our companies have lowered the cost of healthcare by using telemedicine, encouraged adult education through on-line courses, and have lowered the cost and congestion that comes with urban transportation.”

Smiga loves the whole field of VC investments. For him it’s a perfect example for how investors can outperform while doing good.

Mitzi Perdue is the widow of the poultry magnate, Frank Perdue.  She’s the author of How To Make Your Family Business Last and 52 Tips to Combat Human Trafficking.  Contact her at www.MitziPerdue.com.