Some old-economy billionaires have a new calling: venture capitalist.
Having made their fortunes in industries that are increasingly being upended by technology, many of the world’s wealthiest individuals and families are turning to venture investing as a way to bet on the future at a time when fewer startups are going public. Some are backing young companies in hopes of spotting the next potential threat to their core business. Others are lured by the promise of high returns and bragging rights when a startup makes it.
But these rookie venture capitalists aren’t rushing to hang up their shingles in Silicon Valley, widely considered the beating heart of venture investing. Instead, they are setting up venture-capital firms in their hometowns, including New York, Detroit, Los Angeles and Chicago. They’re enticing entrepreneurs with access to their networks. Since many billionaires have built businesses from scratch, they’re hoping that their knowhow will be another selling point.
“These investors are saying, ‘all great venture returns don’t start in Silicon Valley or end there,’” said Michael Kurdziel, managing partner of Participant Capital, which advises families on private equity and venture investing.
Among the new venture capitalists are Wall Street financiers
Steven A. Cohen
who are seeding financial-technology and bitcoin companies from New York.
has closed its $71 billion purchase of 21st Century Fox Assets,
is expected to leave the media company his father founded and plans to start a venture-capital fund to invest in digital and international media businesses, The Wall Street Journal has reported. The family of French billionaire
set up a venture firm with an outpost in Los Angeles to invest in emerging luxury and other companies.
The ultrawealthy were among the first venture capitalists. Bessemer Venture Partners, one of the oldest U.S. venture firms, grew out of steel baron Henry Phipps’ family holding company more than a century ago. Venrock, an early investor in Apple, started in 1969 to invest on behalf of the Rockefeller family.
More recently, venture investing has been driven by hundreds of professionally managed firms, most of them in Silicon Valley. These firms raise money from pension funds and other big investors. The success of top funds and rising valuations of hot startups has made venture attractive to many types of investors.
Investors used to dream of making a wildly profitable investment in a promising company when it was selling shares in an initial public offering. But increasingly, as startups delay going public, investors are vying to back companies much earlier in their development, which has the effect of delaying IPOs even more.
‘If you’re only looking at the public markets, you can’t understand the full economy.’
went public at $21 a share, raising about $60 million. Today, the value of a Microsoft share purchased at the IPO has risen more than 147,000%, including stock splits. By comparison, modern-day venture-backed companies including Uber Technologies Inc. and Airbnb Inc. have raised tens of millions of dollars and are valued at tens of billions without selling a single share in public markets.
“To get the… really, really explosive growth from technology, you have to participate in private markets now,” said Garry Tan, cofounder of early-stage venture firm Initialized Capital, which counts wealthy families among its clients.
Family offices, private firms through which billionaires often invest, stand out partly because of the large amount of capital they have available. According to research by Campden Ltd., family offices have more than $4 trillion in investable assets globally.
There is little data on how much money family offices invest in venture capital, either directly or through outside venture funds, making it difficult to assess their success. Family investors are among the backers of at least 25 unicorns, or those startups valued at $1 billion or more, according to a Wall Street Journal tally.
Vulcan Capital, the family office of Microsoft co-founder
for instance, has invested in augmented reality company Plantation, Fla.-based Magic Leap, in which
also invested recently, as well as music-streaming company
which went public in April. The closing price of its shares the first day of trading ranked Spotify as the eighth-biggest technology IPO, just behind Google in 2004, according to Dealogic.
The family office of hedge-fund titan
has invested in Rubicon Global, an Atlanta-based trash-collection startup last valued at $1 billion. Payments processor Adyen and grocery-delivery company Instacart were among companies that received late-stage funding from family offices, according to the National Venture Capital Association.
E-cigarette maker Juul Labs Inc., which in July raised $650 million from investors at a $15 billion valuation, counts a family office founded by
and his four adult children among its early backers. Mr. Pritzker, a San Francisco investor whose family wealth includes that from the
empire, is also a director of Juul, according to a recent company filing.
Family offices are typically not lead investors in venture-backed companies, although they sometimes can get in early. Mr. Pritzker’s Tao Capital Partners was among the early backers of
investing in 2006. Mr. Pritzker and his sons Joby and Isaac met Tesla and
through venture capitalist Antonio Gracias, an early PayPal backer and family friend.
The Tesla deal, Tao’s first, helped draw the Pritzker brothers into venture investing full time and helped open the door to other sought-after startups. “It becomes part of how you introduce yourself to new entrepreneurs, the list of companies you’ve been involved with before,” said Isaac Pritzker.
Still, many guardians of family capital say they won’t invest in early-stage startups because so many of them fail. “You’re working with young companies to shape them and their business, and it’s certainly not our skill set,” said Steven Rattner, chief executive of Willett Advisors LLC, former New York City mayor
firm. It would be a rare family office that has those skills, he said. Willett instead invests directly in late-stage startups and in select venture funds.
Families’ growing interest in geographies outside Silicon Valley mirrors the increasing presence of venture funds outside California. Although California-based firms accounted for more than half of venture funds managed at the end of 2017, states such as Missouri, New Mexico, Nevada and Washington saw double-digit increases in venture-capital assets under management compared to 2016, according to NVCA and Pitchbook data.
Since 2014, AOL Inc. cofounder
has been traversing the country on a mission called “Rise of the Rest” to spur entrepreneurship in cities like Baltimore, Cincinnati and Pittsburgh. Mr. Case’s D.C.-based firm disclosed in 2017 it raised a $150 million seed fund from wealthy families and individuals, including
of private-equity firm
and recently departed Starbucks Corp. Chairman
It has invested in more than 80 startups outside geographies traditional venture capitalists dominate.
“Successful tech companies are popping up all around [families],” making it impossible not to consider investing, said Jacob Cohen, who oversees venture investments for
the billionaire cofounder of mortgage lender Quicken Loans Inc. and owner of the Cleveland Cavaliers basketball team.
While Mr. Cohen is open to investing in deals led by Valley firms, he also focuses on Michigan-area investments and holds out his serial-entrepreneur boss Mr. Gilbert as a resource to young founders.
Entrepreneur-turned-venture-investor Barak Pridor, who has $100 million from media mogul Haim Saban’s investment firm Saban Capital Group to deploy on startups, too is steering clear of the Valley. He’s training Saban Ventures on Israel, which he deems as friendlier than the Valley. Israel has a thriving community of entrepreneurs and has produced venture-backed companies such as Mobileye, acquired by
for $15 billion.
“Premium deal flow is limited to a few companies in the Valley, so once in a blue moon you might get a good investment opportunity” if you focus on Silicon Valley startups but aren’t locally based, Mr. Pridor said. “That’s not good investment practice.”
Steve Cohen, the hedge-fund titan who was barred from managing outside money for a time after his previous company, SAC Capital Advisors LP, pleaded guilty to insider trading in 2013, has made venture investments with his personal money for years, including in data-analytics firm Palantir Technologies Inc., among the world’s most valuable private companies. He has stepped up his presence in venture capital more recently, creating a business separate from his $12 billion hedge-fund firm dedicated to investing in early-stage fintech and artificial intelligence startups.
“If you’re only looking at the public markets, you can’t understand the full economy,” said Matthew Granade, who runs Mr. Cohen’s Point72 Ventures, citing the work of companies including
, Google and Uber on autonomous cars. So far, the business has invested in three dozen startups and plans to expand its areas of interest.
Mr. Cohen hasn’t bypassed Silicon Valley completely. While his fintech venture team is based in New York, the artificial intelligence team is based in Palo Alto. Mr. Cohen is also a regular presence at CEO roundtables convened by Valley venture firms and Y Combinator’s popular Demo Day, where entrepreneurs who are part of the tech incubator pitch to investors.
Appeared in the August 4, 2018, print edition.This post was originally published here