Australians are now among the wealthiest people in the world. According to the Credit Suisse 2021 Global Wealth Report , 1-in-10 Australians is a millionaire, and more than 3,000 Australians are ultra-high-net-worth individuals (UHNWIs) with wealth surpassing A$60 million. Pair this information with the emerging trend of private investors as key players in the venture ecosystem and it looks like start-ups will soon be courting UHNWIs and family offices as a regular part of their capital-raising activities.
Having worked with private investors for two decades, I know first-hand how difficult it is to solicit capital from this segment. The first step is to understand what motivates them; the second is to design an investment solution that fits their growth strategy and risk appetite.
Find what motivates private investors
In my experience, both UHNWIs and family offices use a twofold sense check before making a verbal commitment: gut intuition and being able to address the question ‘what is special about this business?’. The process of converting a verbal commitment into something legally binding then requires the customary diligence, and the more you know your client, the easier this will be.
Sometimes return on capital is not the only motive for an investor’s involvement. Occasionally you may find a strategic investor who is willing to lend their knowledge or business acumen, or leverage their network or deal flow to benefit your start-up. If you uncover an engaged and experienced investor like this, they add a significant non-monetary value.
Understand their growth strategy
The main strategy for a family office is to establish a system that compounds wealth for future generations. They are highly protective of their capital base, and are therefore keen to avoid significant drawdowns, but they do like having flexibility for family members to pursue their own interests. For this reason, they tend to be attracted to asset-backed investments or protected structures where they can avoid a position of first loss.
What’s also important here is that they have patience, which means long-term compounding investments appeal, and that’s reflected in the rising interest in environmental, social and governance (ESG) investments, particularly among younger generations . With this in mind, Jameson created a Special Situations Fund, a diversified portfolio of hybrid-credit investments which targets social infrastructure sectors that include, childcare, seniors living, and healthcare, in addition to last-mile logistics, self-storage, data centres and medium density housing.
Identify their risk appetite
The shift in risk appetite is hard to ignore. Until recently, family offices were generally conservative in their investment strategy, favouring private equity vehicles with a diversified portfolio of established businesses. Today, three in four invest directly in start-ups, according to Silicon Valley Bank, and not only is the percentage of private funds going to start-ups on the rise, the number of UHNWIs and family offices is also growing.
Try to identify investors who would be willing and able to capitalise further in the face of trouble. The most suitable investors will agree with the theory that if you have a great business, you should hold onto it as long as possible. In practice, most will want to know there is a clearly defined exit strategy or contingency to create liquidity for those that don’t wish to participate in the future.
Manage expectations
It helps if the investor has direct investment experience, whether that’s some familiarity with the structure you are proposing or an understanding of private equity or private debt investment. This makes it less likely that you’ll get to the end of a courting process only to discover there is no meeting of the minds. If they have a financial advisor or professional consultants team, include them in correspondence so you can together ensure suitability.
As with any capital raise, private investors require a lead time, typically 60 days from initial interest to funds landing. Rarely, investors have the ability to make in-principle investment decisions within a week; generally, you’ll need to allow time for due diligence.
Activate their network
Don’t forget that your investors can be your greatest advocates and may introduce you to like-minded investors with new capital for future funding rounds.
The growing wealth of individuals and families and their emerging appetite for direct investment in businesses has created an opportunity for start-ups to pitch to private investors. Better understanding this nuanced segment will be key to unlocking future funding sources.
This article first appeared in SmartCompany here.