Dynamics and disruptions: Co-investments between venture capital and family business
The rise of robotics and artificial intelligence may seem at odds with multigenerational family businesses but Dr Ilian Iliev, managing director of EcoMachines Ventures, says a new pragmatism is forging exciting collaborations between the sectors.
Venture Capital firms (VCs) and family-owned business groups are not natural partners. VCs want strong minority rights, an ability to change management if the company underperforms, and do not mind dilution in shareholdings and control if the company's valuation grows.
By contrast, family-owned business often choose continuity in ownership over a high-risk/high-return strategy, and do not allow outsiders into a business easily. While some of the largest family offices have invested in VC funds as a passive investor, broader links and collaboration between family-owned business groups and VCs were the exception rather than the rule. This is now starting to change.
In the past few years we have seen an increasing degree of pragmatism from both VCs and family owners, which is seeing them co-invest on interesting deals, and even VCs invest in spin-outs from family business groups, sometimes led by a dynamic family member. Of particular interest seems to be venture opportunities in Artificial Intelligence (AI) and robotics, perhaps due to the general purpose of these technologies. Robotics and AI have the potential to transform, or undermine, family businesses across sectors, whether in retail, real estate, building industry, light manufacturing or agriculture.
Family groups and family office principals have different motives for investing in VC deals. It may be they are looking for investment return from a high-growth area, as a passive investor. But where they get actively engaged, we have seen a mixture of motives. Family offices are often attracted to the sectors where there is a synergistic relationship with the core business. For instance, if the family business is in commercial real estate, then there are a lot of smart city/smart building technologies that are highly relevant; if they have a logistics business, they are likely to be interested in warehouse or transportation-related robotics.
So how do such collaborations between VCs and family groups or businesses take place? In one industrial high-tech deal where the initial investor was a syndicate of family business groups, the VC's entry led to some hard but necessary changes in board meeting dynamics and business planning. Over time this allowed the family office principals to spend less time on governance of the company, as the processes introduced by the VC enabled the management team to take greater responsibility.
In another case, the family office principal spent a lot of time with the VC to understand the business plan and go-to-market strategy of the business, and then allowed the VC to represent her interests on the board. At the same time, the VC benefitted from the family office principal's experience in the target sector which the AI company was looking to disrupt.
Family offices are also learning to identify the right VCs they can work with, which are pragmatic and adaptable to the specific needs of family-backed investors. It may be they are looking to deploy family funds into ventures with a positive social impact in environmental technologies, in healthcare or other fields. For instance, the ultra-high net worth member of a well-known family network developed a focus in a specific segment of environmentally sustainable technologies, looking at the use of robotics, AI and satellite-based machine vision applications. As part of his model, he works with several early-stage VCs, providing him with scale-up support for the successful investments.
As a final note, it's important to remember that—robots and AI notwithstanding—people still do business with people. The most important starting point between VCs and family groups is trust, and so it is really important for the family group investors and VC to understand their respective investment drivers and expectations, and how they will work together. For a VC, doing business with a family group is a lot more relationship intensive than with an institutional investor. For family businesses, VCs may sometimes seem pedantic and not pragmatic. However, the time spent to build a relationship can be really beneficial for both parties in the long-run, and for their respective joint investments.
