Despite the UK’s economic recovery, SMEs are still finding sourcing funding difficult. Banks continue to restrict their lending to growth businesses and alternative lenders remain limited in the levels of investment they can provide.
However, one area that is increasingly being explored is family offices, which globally are estimated to have some $2.5 trillion in wealth under management, with roughly around a quarter of that held by family offices in the UK and Continental Europe.
I am the CIO of Omada Capital, which provides investment advice to family offices and often co-invests with them, and also CEO of Omada subsidiary Prime Wealth Group, which last month set up an EIS funding platform to help SMEs tap into family office investment. Here are my top ten tips on how to attract financing from family offices.
(1) Decide on what type of funding
Probably the first issue to decide is what type of funding you are looking for, debt or equity? Some family offices will consider both, others will only consider one of the two options, with equity funding typically preferred to debt.
Also, if you have reviewed your company’s capital structure and believe you need both it’s often the larger multi-family offices that will provide this, so it needs to be a reasonable amount for a company which can shoulder the financing cost – before they will consider.
(2) Are you early stage or seeking development capital?
If it is the equity route you are taking, the next issue is to consider is what kind of equity funding you need, venture or development capital? As a sector, family offices are rather risk averse and development capital is their preferred route.
However, some will consider more venture type investments though they are unlikely to be the lead investors and you will likely need to have a VC house investing alongside to attract family office funding at such an early stage as most don’t have the bandwidth to undertake all the due diligence.
(3) Enter the family office ecosystem
Many family offices operate within a community-style eco-system of professionals. Seven out of ten single family offices cite introductions from professional advisers they know well, whether lawyers, accountants, corporate finance advisers etc as a major source of their investment opportunities.
So it’s important to research the professional firms closest to family offices and seek to build relationships with them to effect introductions to the right family offices.
(4) Focus on the right sector experience
Having decided on the type of funding, choosing a family office that has experience in your sector is crucial. Family offices conventionally focus on the areas in which they are familiar and in which the family fortune was built.
However, as younger generations emerge into management levels within family offices there has been a greater willingness to consider a broader variety of sectors. Currently the sectors where we see family offices most active are, TMT, financial services, healthcare, luxury and energy.
(5) Select the right adviser
Family offices are notoriously opaque, which can make the task of selecting the right adviser who knows the market well, critical. Good advice is to always seek a firm or adviser who is a specialist, not a generalist who also happens to cover family offices.
They rarely know the market well enough and for such a nuanced area you need an adviser who can demonstrate that they have the right level of understanding, familiarity and contacts in the family office arena.
(6) Financials need to be up to scratch
Although typically family offices are not as well-resourced as say investment banks or asset managers, increasingly they are growing in terms of their capability and sophistication, particularly multi-family offices, and do typically now undertake a more forensic examination of a potential investee company finances. Ensure that your FD – or bring one in if you don’t have a full time FD – guarantees your accounts, forecasts, projections, business plan etc can stand up to the most rigorous scrutiny.
Many small businesses have an exaggerated idea of their own value. Obviously, when raising share capital in whatever form (whether through an SEIS, EIS, or plain vanilla issuance) you have to offer the equity at a reasonable price which reflects the overall valuation of the enterprise.
I have seen owners of near-start-ups in low-technology industries believing that they can value their companies at twenty times projected earnings. No investor is going to buy illiquid stock in an unproven venture on this kind of multiple.
(7) Show why you need the funding
Being able to demonstrate exactly why you need funding and how you choose to use any investment is crucial. The more compelling your case, the more thought out your reasoning, the greater weight of evidence and analysis you bring to showcase how this can, for instance, make a material difference to helping scale up the business quickly the more likely you are to secure funding from typically cautious family offices.
(8) Track record is key
Whenever we discuss potential development capital investments in particular businesses with family offices, the most often asked questions relate to the company’s track record so far and the success achieved.
It’s always advisable that if milestones are put in business plans that they are hit, if certain initiatives are launched that they are implemented and are successful. If the company is a start-up, it’s the track record of the management and team that counts. You must prove you have the knowledge and ability to succeed in your new business. CVs aren’t just for job interviews (see below).
(9) Showcase strength of the management team
Apart from track record, strength of the management team is the other key consideration for family offices. Typically they have direct experience of the difference good managers can make in their own businesses and are very focused on ensuring that the management team in place matches the company’s goals and ambitions.
(10) Demonstrate clear exit plan
Family offices are typically longer-term investors than say private equity houses with their, on average, three to five year time horizon. Some family offices are comfortable holding direct investments in businesses for perhaps ten years or possibly longer.
But to get the investment in the first place it’s important to present the family office with a clear exit plan that shows them how they will be able to profitably exit the business.