Many early stage life science companies are turning to family offices for startup funding. Despite the inherent risk present in life science investment, plenty of high net worths are willing to invest in promising technology, either directly or with help from angels or VCs, due to their desire to effect real change in the market. These philanthropic goals – which form an integral part of these families’ legacies – help to quench any feelings of unease that the sector’s riskiness may invoke.
Biotech and Money recently hosted a webinar with three top family office pundits, both from life science and family office backgrounds. Speakers included Matthew Morman, deputy chairman of the family office council; Dr Chris Donegan, founding partner in Azure wealth; and John Elder, founder of Family Office Advisors. Here are a few things we learned about family office investment in biotech during the webinar.
The main difference between SFOs and MFOs is accessibility
Single family offices (SFOs) and multiple family offices (MFOs) differ not just in the number of high net worths they cater for, but also in their investment preferences and strategies. At our conference, Matthew Norman, deputy chairman of the family office council, stated that the main differences between MFOs and SFOs lie in how accessible they are. Whilst MFOs are usually much easier to find, SFOs – as they are not under pressure from clients to produce quick returns – can take a much longer-term view on any investment, hence it is often worth it in the long term to take the time to seek out these notoriously secretive firms.
The level of in-house expertise in life sciences will affect family offices’ investment decisions
Whilst a few family offices, such as Broadview Ventures in the states, are set up with life sciences as their sole interest, most others simply wish to diversify their investment portfolio. Many will not be equipped with in-house life science experts, so will either seek external advice or entrust their money to a VC-run fund.
Dr Chris Donegan, founding partner in Azure wealth, explained at our webinar that a lack of in-house expertise is a reason why many choose to neglect life sciences. When speaking on the merits of expertise, he stated:
‘The utility of experts is limited – and I say that as an expert! Experts fall into many categories, and the two most important categories are people who eat their own cooking amd those who don’t. I always find that investors are relaxed when they know your money’s at risk too.’
He also added that as many experts have background in big pharma, their expertise may not be helpful for those working in small biotechs, as the atmospheres are so different.
Meanwhile Matthew Norman explained that the decisions taken by family offices who have little in-house scientific expertise are often made through a mixture of instinct, the character of the management team and the ability of a team to meet its own targets. In order to ensure success, he suggests that entrepreneurs attempt to find a broker who both understands life sciences and also has experience working with family offices.
The emotional factor in life science investments can compensate for the added risk factor
Although investment in life sciences can be a risky manoeuvre for family offices, the high risk potential is often outweighed by their genuine desire to contribute towards game-changing medicine. At our conference, John Elder, founder of Family Office Advisors, remarked that the emotional factor in life science investments often compensates for the added risk factor over liquid assets, while Matthew suggested that startups should read around what investments have been made by family offices, and to look for recurring investment in particular areas:
‘Look what deals have been done and what families have been investing in that space more than others’.
Chris, meanwhile, added that family offices are often attracted to projects that are similar to their previous investments, as they feel they can claim a certain level of expertise in that field.
Every family office will have its own preference for levels of risk taken
According to Chris, there is a sliding scale of risk in life science investment, and everyone fits onto it at different places. Some family offices will be more inclined to invest in medtech (devices, diagnostics and software) due to its lower risk, and others will favour investment in higher risk areas, such as new chemical entities, which have much greater blockbuster potential; although the risk is greater, the reward potential is huge.
Family offices want you to be ‘part of the club’ before you approach them for funding
Approaching a family office can be a nerve-wracking affair. As first impressions can hugely affect the outcome of your proposal, getting it right first time is crucial. John remarked: ‘you’ll generally find that someone will give you half an hour to present your idea’, but adds that you must emphasise the levels of risk as well as mentioning your successes when presenting.
Matthew, meanwhile, urges startups not to cold call family offices using the often out of date phone numbers and email addresses found in databases, adding that in order to get a proper introduction, family offices expect you to be ‘part of the club’. He suggests that finding a credible person, such as a capital raiser, to introduce you to family offices can be a real door opener.
Use conferences to put your investors at ease
What’s the best thing you can persuade an investor to back you? Chris suggests using biotech conferences to put your investor at ease with your pitch. He advises that if you can present your idea to a room full of investors whose background also lies in life sciences, and the general quality of feedback is good, this will quench any feelings of doubt or mistrust that an investor may have harboured concerning your technology.
A good family office relationship can have real perks for young biotechs
Undoubtedly one of the best aspects of raising capital through a family office as opposed to the more traditional VC option is the close, personal relationship you can develop with them. This is likely to be the case in any investment partnership where the funds you are receiving come directly from the pockets of those with whom you are working – when working with VCs this is usually not the case, so the element of closeness is lost.
Matthew adds that a family office can provide a number of perks for startups, such as office space, a London address and an address book filled with banks, capital raisers and lawyers.
On the flipside, however, Chris adds that families who treat your company like a toy and don’t show it proper respect are one of the major disadvantages to the family office investment model. Being honest and open with one another, and keeping good levels of communication, are paramount in ensuring that the relationship between family office and biotech is as healthy as possible.