David Sachse & Winter Mead: Decoding the Family Office-VC Fund Dynamic

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Dave Sachse & Winter Mead : Decoding the Family Office-VC Fund Dynamic

I’m personally super excited to share this week's newsletter and insights with our readers. We connect with David Sachse & Winter Mead to talk about family offices, emerging fund managers and the evolution/change in relationship. The perspective is amazing from these two because of how embedded they are in Venture Capital.

Winter Mead is the Founder and Managing Member of the investment firm Coolwater Capital , which exclusively focuses on emerging managers and technology investments. It’s kind of like Y Combinator for Emerging Fund Managers.

David Sachse is the Managing Partner at Sachse Family Fund and Managing Partner at Family VC. He invests out of his family office but has also curated a global community of family offices investing in VC.

We get into a bunch of topics this week including:

• How family offices think + their participation in SPVs
• Direct Investments vs backing fund managers
• The change of the Family Office mentality
• Difference in Family Offices vs. Institutional Investors
• The current reset that VC is still going through as both family offices and institutional investors are adjusting strategies
• When Emerging Fund Managers typically run SPVs?
• Why Emerging managers still represent one of the most underserved parts of the alternatives market

First, a little (more) background on David Sachse…

Sachse Family Fund is a venture fund that invests in technology companies, pre-seed to Series A. Family VC is a global community and educational group for family offices, HNWI's and accredited investors who collaborate on venture capital. This is a membership group of peer investors that are learning with and supporting one another.?

Our interview with David:

Last Money In: Any general thoughts on how the family office investment mentality has changed over recent years specifically related to doing direct investments versus backing funds/managers?

David: Over the last 5 years, a few different VC personas emerged in the family office (FO) world and are trending in the opposite directions for future VC investing activity. One persona is FO’s that took a balanced approach to investing in VC (funds and directs) and were patient capital. They are leaning into VC investing more or at the same rate moving forward. Other family offices are pulling back. Especially those with only a few years experience who were very quick to deploy, often larger checks into fewer deals, and they relied heavily on their existing deal flow channels they use for other asset classes (RE, PE, etc).?

Moving forward, I see the experienced FOs are leaning more into LP investing via doing their own or investing in a formal fund of funds. FO’s are taking notes from the GPs at blue chip VC firms and a lot of them are personally LPs in many different funds. Savvy FO’s leverage the data and relationships with fund managers, as a part of their direct investing strategy, to selectively pick direct deals they want to invest in.?

Last Money In: Do you invest in SPVs? If so, how frequently and what types of deals?

David: Yes, but not frequently. Out of 40 direct deals to date, I’ve invested via SPVs only 4 times. These are deals where I’m a smaller check (<$250k) into an often later stage funding round (Series A/B or later) and/or a round of $10m or more. I’ve sourced those through building relationships with fund managers I’ve invested in and those in my expanded network. For FO active in VC, the volume of SPVs thrown at them can be overwhelming to a point where some FO ignore SPVs all together, not merely only due to fees. That’s why some FO turn to sourcing themselves but that can create adverse selection challenges. Family offices are open to carry on SPV, but not if the deal is not. What can kill FO interest in others SPVs is when they see the same deal from multiple different parties, all with different SPVs terms (carry etc). Especially if that deal takes a long time to get funded too. It makes the deal sharers feel very transactional. These are a few reasons I’ve seen some FO attempt to source or do their own SPVs if they aren’t working with VC fund managers they trust.

Last Money In: How do you think family office investing might evolve over the coming decade?

David: The experienced FOs who want to do direct investing are also investing in VC fund managers. Often, they want to have a direct relationship with the VC fund team and not have it to manage it through a wealth advisor or consultant that owns the relationship. Then they leverage the data and relationships with fund managers to selectively pick direct deals they want to invest in. Investment communities amongst family offices are going to become more organized and useful for all involved in the coming decade. I strongly believe more family offices will become active VC investors for the long term. The great wealth transfer from baby boomers to younger gens is occurring and many next gen in the family offices are getting involved in investment communities to learn and invest with peers. The next gens of FO world are much more open to collaborating with their peers. Family offices active in VC are great compliments, not replacements, to successful VC managers.?

Last Money In: Anything else to include on the Family Office topic?

David: To all the players in the VC ecosystem that are courting family offices as partners: treat them as people and not as transactions. More next gens in the family office world are collaborating and sharing notes. Transparency and trust are very key when working with family offices. Family offices active in VC are great compliments, not replacements, to successful VC managers. The family offices and the VC managers who win figure that out the best by stop being transactional and focus on the long term game emphasizing on community, collaboration and supporting each others’ work.?

Now, a little (more) background on Winter Mead…

Winter is the Founder and Managing Member of the investment firm Coolwater Capital , which exclusively focuses on emerging managers and technology investments. Coolwater is an academy for training, building and scaling emerging managers, a curated community of VC investors and early-stage investment specialists, and an investment firm.

Coolwater has helped launch over 175 emerging managers, establishing strong ties and trust with these managers, who form the foundation of the Coolwater community. Winter is also the author of "How To Raise A Venture Capital Fund". Prior to Coolwater, he played a key role in an evergreen investment fund at SAP, co-founded the LP transparency movement called #OpenLP, and served on the committee for the Institutional Limited Partners Association (ILPA), which sets the standards for the private equity industry.

Winter's extensive experience includes private equity and venture capital roles in San Francisco, institutional fund investments, direct technology investments, and angel investing. He also served as junior faculty at Stanford Graduate School of Business, holding degrees from the University of Oxford and Harvard University, and now resides in Utah with his family, passionately solving business challenges.

Our interview with Winter:

Last Money In: Any general thoughts on how the family office/institutional investment mentality has changed over recent years specifically related to doing direct investments versus backing funds/managers?

Winter: Thanks for the question, Alex. At Coolwater, we run the top-rated GP fund accelerator,? focused on emerging managers. We have over 300 LPs who are teachers in our fund accelerator, and a wider network of over 3,000 LPs who indicated they support emerging managers. This is our basis for our perspective on LPs focused on doing early-stage direct investments and backing funds and emerging fund managers.?

In terms of investor archetypes, I do separate family offices from institutional investors. Family offices tend to be more flexible with their mandate; as the saying goes, “one family office” so I’ve seen family offices approach the early-stage investment world with a broader strategy, looking for investment into emerging managers as well as co-investing alongside those managers significantly. For family offices, the emerging managers act as a sensor network for their direct investment strategy. Many times, family offices look to invest in what they know, so for example, if it’s a family office that’s made its wealth through energy, more often than not they will focus on energy-related investments.

For institutional investors, the mentality has not changed per se, but the market definitely has. Starting in May 2022, from my recollection, the market started to shift. Before then, institutions were actively expanding portfolio because they were seeking yield, and re-investing distributions in a path to diversify the portfolio. However, when other asset classes, for example private credit, became more attractive from a returns perspective, and when distributions came down, largely because public and M&A markets slowed as cost of capital increased, it became harder to fit into the mandate of institutional investors.?

Largely, the venture capital asset class is still going through a re-set, as both family offices and institutional investors are adjusting strategies to meet the proper (slower) pacing of venture deployment.

Last Money In: Do you see lots of Coolwater fund managers running SPV’s that their LPs participate in?

Winter: Yes. At Coolwater, we’ve helped launch over 200 funds that have invested in over 5,000 companies. This makes us one of the largest accelerators in the world. From this bird’s eye view of the early-stage venture capital ecosystem, we see a lot of the investment dynamics that play out. We believe we see trends months, and even years, before they are talked about publicly. This is where we want to play.?

For Coolwater fund managers, they typically run three types of SPVs.?

• One, to increase check sizes into existing rounds, they will run SPVs alongside their fund’s investment. This is an indication of conviction in the companies in which they are investing, as well as allows proper diversification for smaller funds.?
• Two, they run SPVs to follow-on into some of their best performing, highest traction portfolio companies. This is the typical way most people think about SPVs.?
• Lastly, some are plugged into venture capital networks that have access to some of the leading technology companies in the world that are still private. Maybe this number is 100, maybe it’s 50, maybe it’s only 10. Whatever that number is, these companies are heavily favored by investors for SPVs because it seems they are effectively investing in private companies that should be public, and therefore the risk is viewed as lower than a traditional startup investment.?

Last Money In: As you work with both fund managers and those investing in funds, how are institutional investors seeking value from their fund managers outside of returns (i.e. more direct deal exposure etc.)?

Winter: It depends on the institutional investor you are talking about. There are purist institutional investors, for example, fund of fund investors that only allocate to funds and do not do co-investments. I would argue these investors are selling a diversified portfolio to their own investors, and they are experts in underwriting funds. Arguably the downside risk is lower for these diversified portfolios, and therefore investing in funds is a way to protect their LPs’ capital, and achieve outperforming returns that venture capital offers.?

There are also institutional investors that absolutely want more direct deal exposure, so they partner with emerging managers that will offer deal flow.?

There are also other types of institutional investors that seek additional value from emerging managers. For example, there are many emerging VCs that have taken corporate LP capital, and the expectations around insights into technology developing in certain industries is very relevant for these partnerships.?

Last Money In: Any thoughts on how the relationship between GPs and LPs will evolve over the next decade?

Winter: The relationship between GPs and LPs has been evolving for a while. 10+ years ago, it was much more clear WHO was a GP and WHO was an LP. Now, there is a lot more fluidity across the GP and LP worlds. I would argue many if not most of the GPs I know invest into other GPs, either to support relationships, or to augment their own investment strategies. As well, many LPs perhaps noticed that one way to increase returns, and reduce fees overall to venture capital, is through co-investing and direct investing alongside their fund investments into breakout companies. I imagine we’ll continue to see more fund of fund investors that seek to invest a portion of their portfolios into direct investments, more family offices with a broader strategy investing into funds and direct companies, as well as more institutional investors becoming diversified asset managers with multiple products that offer investment solutions for their clients across stages, capital structure, and asset classes.??

Last Money In: If there's anything else on your mind or interesting that I did not ask, please feel free to include here as well!

Winter: Emerging managers still represent one of the most underserved parts of the alternatives market. In venture capital, emerging managers are by definition small, and therefore they offer an opportunity to access diversity and planet-first investment opportunities for family offices and institutional investors. As well, because of the fund sizes, emerging managers mainly support pre-seed and seed companies, which is where a lot of talent development and innovation is occurring. Supporting emerging managers is supporting diversity, sustainability, new technology, innovation, and the opportunity to generate significant returns when done properly through skilled manager selection.?

If you enjoyed this article, feel free to view our prior posts from guest GP authors

• VC Funds Regulatory Playbook by Top VC Lawyer Chris Harvey
• Tech Titan Martin Tobias Shares the SPV Strategy for Fund Managers?

Last Money In is Powered by Sydecar

Sydecar is a frictionless deal execution platform for emerging venture investors. We make it easy for anyone to launch SPVs and funds in minutes, with automated banking, compliance, contracts, tax, and reporting so that customers can focus on making deals and building relationships.

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?? Written by Zachary Ginsburg and Alex Pattis