Whilst venture capital continues to be a key driver of biotech investment, financing from private investors as well as their family offices is an important pathway to and pool of capital – for biotech to develop innovation into marketable products.
The separation between private investors and family offices however is often not precisely clear to capital seeking biotech CEOs. Family offices manage the financial investments of their clients, either single or multiple families. Commonly, investment areas are divided into three big-picture categories: investments with “diversified exposure”, real estate, and direct operating businesses. The latter is where selective biotech investments are made. However, family offices rarely have the requisite skill to advise on topically complex investments: the background of most office executives is that of a CFP/CPA, risk, manager, equities portfolio manager, or public markets investment management of some sort, whilst rarely have they had prior careers in originating deals for an early-stage PE or even VC firm. Families then often still want to invest, so they proceed with little to no help from their family office, conducting direct investments on their own.
This leads to a few highly common mistakes which we see repeatedly being done:
1) Investing With No Set Strategy: Many have spent decades building a business or portfolio prior to successfully selling it. Upon the liquidity event, they become tempted by reinvesting the proceeds, getting approached with investment ideas before they have finalized fundamental themes including objectives, risk tolerance, horizons, criteria, etc. yet decide to allocate to a startup across the street, or a seed deal, or a friend’s biotech development project. The solution for families who are about to go through a liquidity event, or just did, is to stop taking meetings, conducting due diligence, and allocating – until they have a high conviction roadmap for each part of their wealth portfolio.
2) Over-Spending & Allocating After Liquidity: A similar but separate mistake is over-spending and -investing shortly after a liquidity event. Whether in the form of excess purchases or overallocation, many families spend a quarter of the net worth they created over a lifetime within the first three years of realizing it. Often, respective investments are not possible to be unwound without sizeable haircuts. The solution is to spend time, and resource, into appreciating one’s individual investment requirements, values, personal circumstances, as well as the reality to be created with the available proceeds – specifically as opposed to feeling pressured by the available free cash balance.
3) Lack of Integration: Many high net worth families operate without a clearly defined set of values, a documented investment mission, governance rules of engagement for the family members, or even priorities. This undermines quality investment decisions at the outset. The solution is to continue what will usually have already been good principles during the years of value creation: act fully integrated, remain connected, be aligned, invest energies in moving in the same direction, and collectively be smarter than competition.
4) Playing a Generic Game:
Possibly the largest mistake though is having no game board set up, or attempting to play someone else’s game who has distinct strengths from one’s own – including other pools of capital available to biotech e.g. in particular venture finance. Setting the own family investment apart by relating to the family’s value creation story, strengths, location, access, insights, and resources should allow playing a game few others or nobody else is. This may include employing a trust company or family office while dedicating an own experienced team to the rolling-up of a specific niche area possibly as complicated as stem cell treatment. Without knowing the rules of the game though, there is rarely a chance to know how to win it, enjoy it, have the right players in, and be able to keep score and count how things are progressing.
It is the combination of knowing the industry, oneself, competing pools of capital, and finding the intersections of all of those that create an approach specific to a successful family investment in the biotech arena.