What family offices should look for in a growth venture capital fund

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You know the old “Find a Hole and Fill It” business advice, right? Brian Smiga, co-founder and managing partner of Alpha Partners, has “a $ 20 billion a year gap,” and he has a potentially lucrative way for clients to fill it: private technology investing before the introduction in stock exchange.

“A lot of families would like to be involved in the world of private technology investment,” 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 startups fail between Year 2 and Year 5, and 75% of VC-funded companies never return money to investors.

Smiga adds: “Some family offices who have tried it have been kicked in the teeth. They may want to come back, but they are looking for a safer way to get into private investment in technology.

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

Venture Capital Growth Fund

What he means by “small venture capital growth funds” are those that manage less than a billion dollars. In his opinion, these create an oversized return.

“Of the roughly 2,000 venture capital firms that currently manage $ 548 billion in total assets under management, 1,300 have less than $ 100 million in assets under management. And yet, 8 out of 10 unicorns in the past 10 years have come from these smaller funds. Venture capital growth funds then select the best of these mid-stage companies, such as Series B, C, and D when the companies have established their leadership and fundamentals. “

How to enter?

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

  1. Do a Google search for risky growth funds with less than $ 1 billion under management. “These regularly outperform larger funds,” he says.
  2. Look for those that match your expertise. Are you in agriculture? Social media? Education? Medication? Pharmacy ? “Pick a venture capital fund where you know the terrain. You want to invest in things that you understand. You will also find that by partnering with a venture capital fund, it is likely to provide you with invaluable networking opportunities for deals and with other experts with similar interests.
  3. Choose the ones that suit you geographically. “If you live in an area away from major investment centers, you can add a lot of value to the fund, as the VC is likely to appreciate the extra connections you can offer. “
  4. Understand your risk tolerance and time horizon. Funds investing in pre-seed companies – Series A companies tend to have a model that invests in many companies with the understanding that one or two investments will pay 50x to 100x. Often these funds also take more than 10 years to repay the principal. On the other hand, later stage growth funds, similar to Alpha Partners, seek to offer a consistent history of return on capital over a shorter time horizon. These funds look for investments that pay between 5x and 10x over a 5-year period.
  5. Choose venture capital firms that allow you to partner with and co-invest with them through SPVs. “It can be very profitable, when you’ve picked the right ones. Typical yields are above 20% IRR. “
  6. Research and interview several funds. “If that was my money, I would study and interview at least twenty VC firms, then pick two to invest in, after a lot of diligence.”

Smiga has one more reason to love VC growth funds. “They can make you money, but at the same time, they make the world a better place. To take Alpha as an example, our companies have reduced the cost of healthcare by using telemedicine, promoted adult education through online courses, and reduced costs and congestion associated with urban transportation.

Smiga loves the whole area of ​​venture capital investments. For him, it’s a perfect example of how investors can outperform while doing good.

Mitzi Perdue is the widow of poultry magnate Frank Perdue. She is the author of How to make your family business last and 52 tips for fighting human trafficking. Contact her at www.MitziPerdue.com.


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