Ameeth Sankaran, partner at 2M Companies, the family office of Morton H. Meyerson (a Dallas billionaire), recently wrote an article about family office investing and its benefit to entrepreneurs. Sankaran sits on the Board for 8 companies, has worked as a consultant for many more, and is very active in the startup community. In his article he explains how entrepreneurs should think about family offices (companies that manage investments for a wealthy family) and how to assess whether they are a good fit as an investor.
“It is critical for entrepreneurs to understand which investment approach is being employed for a given investment, and broadly how sophisticated (and involved) the family office will be.” Sankaran writes.
Sankaran explains the different dynamics for entrepreneurs to consider regarding family offices. Family offices are often more “patient” than other types of funds. They often don’t require returns in a certain time frame, and can align their interests to those of the company they are investing in. This can be a benefit to entrepreneurs, because of the lower risk of losing the investor due to a period of poor performance.
Family offices can invest in one of two ways. The first way is operationally, in which case the family office acts in a similar way to a private equity firm. They invest in 50% or more of the company shares, and may bring in new management or restructure leadership, among other things. The second way is more hands-off and strictly financial, similar to a venture capital firm. The family office usually invests in 50% or less of the company and may help with network, expertise, and capital, but will not manage the company. This is the way in which Sankaran says the family office has the advantage of being more patient with the investment.
While the need for sophistication will vary based on the amount of involvement they will have, a family offices are evaluated for this in four areas: impact investing, decision-making, commitment from the patriarch, and asset size, and personnel.
To learn more about how to evaluate a family office as an investor, you can read the original article here.