Family offices are ploughing into venture investing at unprecedented levels, fueled by a tech boom not seen since the dotcom period of the late 1990s. But these investors might be unwittingly helping to create a bubble that could burst anytime soon, some are warning.
In the first three and half months of 2018, family offices backed more than 70 direct venture deals worth more than $1.4 billion in various funding rounds, according to Family Capital’s analysis of data from CrunchBase. OK, not all of that money came from family offices, because many of these deals were co-invested with venture funds, or similar groups. Nevertheless, backing startups is becoming increasingly popular with family offices, particularly in the US.
Moreover, the direct investing by family investment groups is likely to be just the tip of the iceberg when it comes to the true level of money going into venture from these groups. Direct deals by family offices tend to be underreported, particularly in Europe and many emerging markets. And, more importantly, most family office money is flowing into venture indirectly through funds they back as limited partners.
And some of these funds have ballooned with money from family offices as well as institutional money in recent years. Silicon Valley venture fund royalty, Sequoia Capital, appears to be raising bigger and bigger funds, with reports early this year saying it was targeting an $8 billion fund to invest in venture in China. But that is minuscule compared with the SoftBank Vision Fund which has more than $90 billion at its disposable to invest in venture and has reportedly deployed around a third of this already. SoftBank’s CEO Masayoshi Son is already talking about launching further Vision funds to invest in ventures around the world. If so, this will just fuel the bubble even more.
Unfortunately, the tech startup boom has devolved into a dangerous bubble…
Although all this money is being hailed as brilliant for startups and venture businesses in general, it is also leading to an arms-like race in the world of venture financing with big venture groups looking to raise bigger funds to compete with the likes of Softbank and Sequoia.
All this cash is also pushing up valuations and expectations of future payouts. Some startups are attracting unbelievable amounts of funding like the ridesharing venture Lyft, which has so far received more than $4 billion in funding, and a dog walking app called Wag that’s received more than $300 million since being founded in 2014.
Some experts are getting worried about all this activity. Professional bubble predictor Jesse Colombo reckons there’s a tech bubble emerging and investors should be increasingly aware of the downside. In a recent note he said: “Unfortunately, the tech startup boom has devolved into a dangerous bubble as a result of record low-interest rates and the trillions of dollars worth of liquidity that is sloshing around the globe as a result of central bank quantitative easing (QE) programs.” Colombo apparently predicted the financial crisis of 2008.
A recent Wall Street Journal article has also highlighted concerns about overvaluations in the tech sector.
Of course, with interest rates still low and global liquidity at record levels, the boom in startup investing might still have some way to go. But investors like family offices should be managing their exposure to venture investing with some good portfolio management advice right now. If they’re not, they could see big losses in the years ahead as many of them did with their hedge fund exposure in 2008/2009.