How Family Offices Invest in the Future
Many VCs hope to onboard a family office or two as LPs in their funds. But what goes on behind the scenes when a family office chooses an investment is rarely visible to the hopeful VC. Our latest DiffuseTap session gave us a peek at the inner workings of family offices, thanks to veterans Peter Braxton, Director at Envoi LLC, and Andrew Bluestein, Co-Founder and Managing Partner of Bluestein Ventures.
DiffuseTap is a weekly virtual event hosted by Diffuse that is part networking (you’ll meet at least a half dozen high calibre startup players) and part purposeful (you’ll DiffuseTap new ideas).
Managing Risk, While Managing the Family
Peter Braxton leads business development for Envoi, a multifamily office with 33 families and a $5 billion balance sheet. In a feat to capture outsized returns and diversify their portfolios, some families under Envoi’s management seek to deploy capital in the venture capital asset class. Given Peter’s expertise in making decisions for some of the wealthiest families in the country, an obvious question emerged from the audience: Would Peter ever involve his own immediate family in the business?
“My older brother, he’s a neurosurgeon in Colorado. He’s the only neurosurgeon in Eagle and Summit County, Colorado. He’s one of the smartest people I’ve ever met. He’s got an MD from Penn and an MBA from the Tepper School of Business. I would never go into business with my brother.
“He’s incredibly risk-averse. I am not. We have different liquidity requirements, active vs. passive investment styles; different risk tolerances. All that would cause is a recipe for a “food fight;” — heated arguments over Thanksgiving Dinner, where my mom would serve as referee. The families I deal with and represent are in business with each other simply by being born. Being in business with your sibling or parent is imposed/obligated, and that brings in a different family dynamic.”
This sentiment is as true for Peter’s personal life as it is for dealing with the families invested in Envoi. An overly risk-averse mentality does not work in your favour when investing in venture capital, according to Peter. The single job of a family office is to manage risk and manage information. Though in the case of venture capital, the risk-reward structure is on the opposite end of most family office’s wealth preservation strategies: The higher the risk, the greater the reward. A family needs to come to terms with who and which generation they are investing for, before making such commitments.
To merge the two disparate worlds of family offices and VC funds into a productive union, an extensive part of “getting to know the family” is needed from the get-go. Especially knowing where the family is in their “cycle of wealth;” risk appetite is key. Peter explains:
“Identifying long-term goals early on is key to a successful partnership. To be able to take on some type of illiquidity risk or illiquidity premium that they’re seeking through a venture, either through direct deal or via fund, is something that needs to really be carefully thought out in a family office.”
VC Investments, Worth the Risk?
Our second speaker Andrew Bluestein co-runs his family investment vehicles alongside his dad. When they started their family office in 2014, the first question they had to ask themselves was “What are our long term goals and objectives?”
“We were on Gen Two, my kids are Gen Three, and we’re trying to build a multi-generational business. We had to look at where we are at our balance sheet, and how we wanted to allocate our investments to different asset classes. Also, we had to evaluate what risks we wanted to take, and how we could maximize our risk-adjusted returns. That was our goal. We had to decide how much risk we want to take, and then do as good a job as we can to get the returns off that while managing risk.”
Seven years on, Andrew decided to go into a higher risk asset class and start their own VC fund, focused on the food industry. He immediately noticed a difference in how taking risks was incentivised. Andrew explained:
“As a fund, your incentives are really based on two things: How much return you generate on invested capital, and how much invested capital you have. Therefore, a central question we had to ask is ‘How much are we investing today,’ and ‘Should we raise future funds?’”
With this in mind, Andrew and his family decided to work with a fixed capital amount where they wouldn’t have to knock on investors’ doors to access more capital. This meant that they had to shift their focus towards maximizing returns for the capital they had on hand.
“It’s a slightly different perspective because every single investment needs to stand on its own, and there are some efforts that we don’t have to go through. I think that sometimes that leads to different dynamics when thinking about what I’m trying to do with the asset class.”
With both family dynamics and asset class complexities at play, running a family office that invests in venture capital can be challenging. That said, if you have a tight handle on your risk appetite, a clear view of what goals you want to achieve with your investment strategy and the right people to help you execute, the interplay of family offices and venture capital can be immensely lucrative.
Meet the Speakers
Peter Braxton leads the Chicago office of Envoi LLC, a management-owned private family office that thrives on serving on behalf of ultra high net worth individuals and families, delivering comprehensive wealth counsel for taxable investors, and representing families to brokerage firms, investment managers, trust companies, and private banks.
Andrew Bluestein is the Co-Founder and Managing Partner of Bluestein Ventures, a Chicago-based family-owned VC firm investing in game-changing early-stage ventures across the food industry, spanning the entire value chain including both B2C and B2B.
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