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Family money puts its faith in European technology
[LONDON] Some of Europe's wealthiest families are investing chunks of their cash in technology companies, bringing the benefits of long-term horizons to start-ups and filling a funding hole for the continent's fledgling Facebooks.
European family offices, the private investment houses of the super rich, nearly doubled their direct investments in companies between 2008 and 2014 to nine percent of total portfolios as low interest rates hurt returns elsewhere, according to a report by Campden Research and bank UBS.
That may not seem like a lot, but with average assets under management of US$890 million, each European family office has around $80 million to play with for direct investments.
Many are using the cash to bet on tech, stepping in where venture capital is reluctant to tread.
"The sector is very important for them," said James Innes, a partner at London corporate finance house Chrystal Capital who consults over 300 family offices on early-stage tech investments.
"When families do their allocations on direct investing, they have accepted it is on the riskier side of life. They want things that potentially give you significant multiples on your cash. That's tech."
Pairing up with a rich benefactor brings advantages for the start-ups. As investors, they have far longer time frames than private equity houses or venture capitalists, can make investment decisions more quickly and bring proven business acumen to the management of nascent companies.
"With a family office you don't have a time horizon. We like the long-term focus. It's great to have an investor who doesn't view going public as an exit opportunity, but rather a chance to buy more stock," said Pere Valles, Chief Executive of Spanish electoral technology company Scytl.
It is not just European family money.
Scytl received a US$40 million cash injection from Vulcan Capital, the direct investment wing of Microsoft co-founder Paul Allen's personal holding company.
"We were approached by private equity groups initially, but when Vulcan Capital approached us we stopped right away," Mr Valles said.
Start-ups now actively seek-out family wealth operations, according to Peter Newton, a portfolio manager at Campden Wealth who organises meetings between early stage media and sports tech companies and potential investors.
"When you speak to the companies, they'll say 'I really want to find a family office to invest in me... that'll help us grow far better than a venture capitalist who wants to come in, make his money in four years then disappear,'" he said.
Family money comes with another perk: those who manage it don't have to dedicate a portion of their time hunting around for new investors, and can spend more hours on the businesses they invest in.
"They amount of time they dedicate to us is unbelievably impressive. It's way above anything I've seen," said Ed Bussey, founder and chief executive of London-based content creator Quill Content, which last year received a 5 million pounds (US$7.7 million) investment from Smedvig Capital, the direct investment outfit of the Norwegian family oil dynasty of that name.
Old wealth is also plugging a venture capital funding gap that has long plagued European companies trying to make their way from tiny start-up to the big time.
Last year Europe-focused venture capital raised only 300 million euros in late stage funds for such companies, compared to the US$3.7 billion in the United States, according to data firm Preqin.
Family wealth is helping fill the hole, said Tim Hames, director general of the British Private Equity and Venture Capital Association.
"It's a huge development across the piece. It's a bit like the impact shale is having in oil and gas. It's a completely new sort of supply," Mr Hames said.
While potential return on investment is a big draw for investing in tech start-ups, family dynasties can have other ideas in mind when investing in the sector.
Industry players told Reuters the motivations include giving their millennial heirs greater scope to choose investments in an area that they know, infusing their traditional businesses with the latest tech, or simply having something to jazz up dinner party conversation.
"They like small tech companies that they can follow closely on a day-to-day basis", said private equity lawyer James Grimwood, whose firm CMS Cameron McKenna increasingly offers family wealth legal services. "It's a hobby," he added.