· Mark Davis · Investors · 5 min read
Why Startups Should Avoid Raising Capital from Family Offices
When seeking funding, startups should be cautious about accepting investments from family offices. Although they manage significant assets, family offices often lack the startup expertise and aggressive growth focus needed for early-stage companies. Their investment strategies are typically more conservative, and this misalignment can hinder your startup's potential. Additionally, granting a family office a board seat can lead to strategic conflicts and reduced agility in decision-making. For optimal growth and support, startups should prioritize investors with a proven track record in scaling businesses.
Entrepreneurs in the US have various funding options, but not all are equally beneficial. This post explains why family offices may not be the best choice for early-stage startups.
What is a Family Office?
A family office is a company established to manage the finances and investments of a single or a group of wealthy families. Despite the differences in their setups, all family offices focus primarily on preserving personal assets and investments, often leaving business management to other internal functions or professional service providers. The family office team typically includes the primary benefactor, investment managers, chief of staff, an accountant, and administrative support. Some are small with a handful of people, while others are large conglomerates with hundreds of employees.
Why Family Offices May Not Be Ideal for Startups
Family Offices Invest Little in Startups
While the average family office manages $1.2 billion in assets, they usually allocate only 5-10% to venture capital, roughly $60 million. Top-tier VC firms demand far more substantial commitments, meaning few family offices can invest directly in these funds. Instead, they may invest in smaller funds or distribution funds (funds of funds), diverting their attention from startups.
Lack of Expertise in Startups
Family offices are experts in investment but not in startups. They focus on preserving their benefactors’ assets and typically invest in global stocks, bonds, or private equity funds. They lack the processes, talent, and experience to efficiently conduct due diligence and evaluate innovative markets and technology.
Misaligned Investment Horizons
VC funds typically have a ten-year lifecycle to realize returns on their investments, creating a sense of urgency for growth and exit. Family offices, however, do not face this restriction and often invest in illiquid assets, allowing them to wait out difficult market periods. This lack of urgency can lead to strategic misalignment, as VCs push for aggressive growth while family offices may prefer conservative growth over a longer time horizon.
Limited Value Add for Early-Stage Startups
Beyond capital, startups need networks, hiring help, customer acquisition support, and operational excellence. While VCs often promise these resources (though few deliver), family offices generally lack experience in witnessing successful startups grow and thus cannot provide the strategic advice needed by early-stage companies.
Founder Story: When a Family Office Investment Went Wrong
A B2B SaaS founder (who asked to remain anonymous) shared their experience with family office capital:
“We raised $2M from a family office at our seed stage because we couldn’t close our VC round fast enough. The first year was fine—they were passive. Then things changed.
When we needed to pivot our product after missing growth targets, they wanted to ‘pause and reassess’ rather than move quickly. Our VC board members understood that pivots are normal; the family office representative kept asking why we ‘got it wrong the first time.’
The real problem came at Series A. Three VCs passed specifically because of our cap table. One partner told me directly: ‘Family offices on the cap table are a yellow flag. Family offices with board seats are a red flag. You have both.’
We eventually bought them out at 1.2x their investment—$400K we could have used for growth—just to clean up the cap table for Series A.”
Key takeaways from this founder’s experience:
- Family offices can become blockers during pivots when speed matters
- Cap table composition affects future fundraising
- Board seats create ongoing governance friction
- Buying out early investors is expensive and distracting
When Family Offices CAN Work
Not all family office investments are problematic. Here’s when they might make sense:
| Scenario | Why It Works | Proceed With Caution If… |
|---|---|---|
| Late-stage (Series C+) | Less need for operational support; more predictable returns | They want governance rights disproportionate to their check size |
| Strategic family (industry expertise) | Family built wealth in your industry; brings real connections | They expect involvement beyond their expertise |
| Bridge round (small check, no governance) | Quick capital without VC timeline; fills a gap | They want a board seat or protective provisions |
| Evergreen-focused startup | No pressure for 10-year exit; aligned on long-term building | Your other investors expect traditional exit timelines |
How to Handle Offers from Family Offices
If approached by a family office, consider these steps to protect your startup and focus:
- Engage Selectively: Only engage with family offices that have a history of investing in startups.
- Thorough Due Diligence: Conduct extra diligent background checks on any family office offering to invest.
- Investment Round Participation: Allow family offices to join an investment round, but never let them lead it.
- Board Seat Limitations: Avoid giving a family office a seat on your board of directors.
- Protective Provisions: Be wary of custom protective provisions that are uncommon in the VC industry.
Red Flags Checklist: Family Office Investment Terms
Before accepting family office capital, review for these warning signs:
| Red Flag | Why It Matters |
|---|---|
| Board seat request for under $1M investment | Disproportionate control for check size |
| Custom protective provisions | May conflict with future VC terms |
| Right of first refusal on future rounds | Slows fundraising, signals control issues to VCs |
| Veto rights on strategic decisions | Blocks pivots, M&A, key hires |
| No prior startup investments | Lack of understanding of startup dynamics |
| Originated from wealth advisor, not family | May lack true decision-making authority |
Conclusion
Family offices might seem like a perfect solution for startups struggling to raise funds from angels and VCs. However, their primary focus on asset preservation, lack of startup expertise, misaligned investment horizons, and limited value add can be detrimental to early-stage companies. If you do involve a family office, ensure thorough due diligence and safeguard your startup’s strategic direction by limiting their control and influence.
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Mark Davis
Co-founder, I'mBoard
Mark Davis is Co-founder of I'mBoard. Having served on dozens of startup boards, he knows the pains from both sides of the table - as an exited founder/CEO turned investor.
