Family offices turn their attention to tech companies
A fifth of new venture capital funds raised in Europe come from private wealth
Javier Espinoza DECEMBER 3 2019
Rohini Finch is putting her money where her passion is: risky yet potentially lucrative technology companies. Previously an oil trader, she and her husband Bob set up a family office to manage the wealth they had accumulated working in the City of London. The pair began by investing in bricks-and-mortar assets, including a farm in Ukraine, but roughly a decade ago switched to technology companies. Finch observed how technology ran through different industries, from health to financial services, and applied this insight to the investment philosophy behind her company, Talis Capital. “Technology touches everything,” she says. “Everything is being disrupted by it.” Wealthy individuals such as Finch are emerging as the fastest-growing body of investors in technology. New research by database company Dealroom.co shows a fifth of new venture capital funds raised in Europe come from private wealth, with the rest coming from institutions. Over the five years to 2018, the number of individuals and families using private wealth to invest directly in early-stage technology companies in Europe grew fivefold to a record-breaking $5bn. This year, the figures are on track to reach new highs. Dealroom.co’s research also found an increased allocation of capital to venture capital funds as entrepreneurs have sought greater yields in today’s low-interest-rate environment. Globally, the allocation of private wealth to these funds has nearly doubled since 2008, from 14 to 22 per cent, and has overtaken the amount of capital allocated to property investments, which stands at 18 per cent.
“Technology touches everything. Everything is being disrupted by it
Thanks to the tech boom, millionaires with money to invest are getting younger too. A Bloomberg study revealed that since 2011 the average age of US investors with $25m or more fell by 11 years to 47.
Talis Capital has invested more than $600m in technology businesses since 2009. Highlights in a portfolio of 50 companies include cyber security company Darktrace, challenger bank Iwoca and identity-verification provider Onfido.
The attractions of early-stage companies are clear. In the US, companies such as ride-hailing app Uber and holiday lets platform Airbnb have rocketed from start-up stage to a market capitalisation of $46bn and a valuation of $42bn, respectively. In Europe, Spotify went from being an obscure Swedish streaming site to one of the world’s most valuable tech companies, worth some $27bn.
But investors have also been burnt badly when going after the latest shiny new thing. Lossmaking WeWork, the office-sharing company, has seen its valuation plunge after a series of investigations into its business practices.
Start-ups are exposed to wider economic risks and are inherently riskier because of their often untested business models, warns Matus Maar, managing partner at Talis Capital. “The risk of a potential change in the macroeconomic conditions, a development of other innovations which can result in a company being less relevant or a lack of investment are all risks for technology companies,” he says.
Maar also says technology companies pose a specific threat to investors who fail to diversify. “A particular risk relating to investing in early-stage technology companies is that if you don’t buy into a group of companies, the chances of succeeding are low,” he says. It takes an average of seven years to sell a tech company, he says, and most of the return comes from a few hyper-successful outliers. Investors should take a portfolio approach to have the best chance of “catching the winners”, he advises.
The hype over technology companies has led to record valuations. As with the property market, sellers wanting to sell at unrealistic levels and driving up prices may one day lead to a crash, say analysts.
Finch says the high prices demanded by founder-entrepreneurs is making it more challenging to invest in tech companies than when she started. She does not think the sector is in “bubble territory”, even though certain tech companies might be, and that there are still opportunities for savvy investors.
Finch warns there could be “a fresh wave of selling” in publicly listed tech companies as the lock-in periods imposed on founders and managers at flotation time expire.
There are, however, still opportunities,” she says. “We have had a 10-year bull run, but people are underestimating how much productivity tech has added to companies. There is a huge amount of private wealth going into technology and we are not coming to an end, that story has a long way to run.”
Beyond the business opportunity, Finch has a more personal motivation to invest in technology companies: legacy. “We did not want to leave money to our children,” she says. “We wanted to leave them businesses they could be involved in.”