Giving Compass' Take:
- Family philanthropy has the opportunity to fill a funding gap because they are uniquely positioned to invest in pre-revenue, pre-product visionary founders.
- How can family philanthropists collaborate to ensure these investments are successful? What steps can you begin with?
- Read more about family philanthropy.
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With any type of investing, the higher the risk, the higher potential reward (or potential loss). In the venture industry, you can measure appetite for risk on a time scale, with traditional limited partners (LPs) living five to 10 years in the past, founders living 10 years in the future, and emerging managers in the middle trying to bridge the gap.
The way that traditional LPs are set up incentivizes them to invest in things that are commercial — the obvious bets of the moment. Because their funding sources tend to be made up of things like pensions and endowments, they’re managing a lot of bureaucracy around how they invest the money. And rightly so — they have to be very risk averse while investing in an inherently risky asset class.
Because these LPs are forced to be years behind the curve, their very definition of emerging managers is outdated, as the ecosystem has exploded and is constantly evolving. Kelly DePonte, managing director at Probitas Partners, told Venture Capital Journal in July 2021 that between 30% and 50% of traditional LPs won’t invest in emerging managers.
True value is created when an idea isn’t obvious yet, when most people are missing it. If it’s obvious, there would be a ton of money in it already. Outside returns also come from the ability to do things others can’t — like quickly responding to the changing market.
You can find new managers investing in pre-revenue, pre-product founders with visionary ideas that seem to push the limits of what’s possible. These unproven managers must gain conviction in their founders completely independent of the social signaling of the well-known institutional funds. Traditional LPs just can’t meet the emerging managers risk-wise, even if they wanted to, so the big-name institutions are sitting these opportunities out.
The role of family offices in the venture ecosystem has grown dramatically, largely because they are perfectly positioned to fill the funding gap. A 2020 report by Oper8r found that more than half of LPs investing in microfunds are family offices and individuals.
Read the full article about investing in visionary leadership by Heather Hartnett at Forbes.