Family Offices: The New VCs

10 Dec

By Dennis Ford, CEO, Life Science Nation

dennis-websitThere is not enough capital to fund all of the good ideas from life science companies, which is a major challenge for life science CEOs today. To identify the next not-so-obvious investors, fundraising executives should look to the capital-raising practices of start-ups in other industries. If they do, they will learn that the basic premises include thinking outside the box and being flexible and more creative.

The economic turbulence of 2008 and 2011 has forced institutional investors and family offices to reevaluate how they fundamentally invest. The poor performance of some of VC and PE fund managers have concentrated fewer dollars in the hands of fewer managers, and the increased competition for those scarce dollars have slowed the life science market at a time when the number of potential technologies and products are surging. The banks, pensions, endowments, and insurance funds that made up a large portion of new VC and PE funds have become risk averse.

However, a new paradigm is emerging: family offices, the investment and philanthropic arms of ultra high net worth families and individuals, are becoming the new VCs. The void left by the institutional investors is, to a surprising extent, now being filled by family offices. They have brought Wall Street talent in-house and adopted and incorporated all the processes and procedures of alternative institutional investors. There is a lot of press being generated about this new opportunistic investor in the life science arena.

The big win for life science fundraising executives is that unlike traditional alternative institutional investors, family offices are not solely driven by a rate of return. They also want to see their investments benefit and impact the world. This opens yet another door for life science entrepreneurs: starting with the philanthropy arm of family offices.

The fact of the matter is that philanthropy and life science investment go hand in hand. Bill Gates, Warren Buffet, Michael J. Fox, and many other billionaires and celebrities have all contributed to making it politically correct to be globally aware and to put capital behind facilitating science and technology that can change the world.

Life science fundraising executives who are quick to take advantage of the shifting investor landscape have an opportunity to find investors who are interested in their company’s research and at its current stage.

According to a Grant Thornton/ Prince Associates survey of domestic and foreign family offices during the first quarter of 2012, the average investible assets of a family offices are roughly $276 million, and seventy-eight percent of family offices already invest in private equity in some form. This equates to a multi-billion dollar asset pool that is rapidly expanding. A similar survey in 2009 found only about 30% of offices involved in this space. Of those family offices that invest in private equity, 17% put 25% of their investable assets or more to work. More common is between 10% and 25%. Forty-seven percent of offices fall in this category. Increasingly this group is moving away from funds and moving towards direct investments, which is major news to CEOs looking to raise capital and represents an unprecedented shift in the industry.

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