10 Rookie Mistakes Every Family Office Should Avoid

Rookie Mistakes Ron BurgandyWe’ve seen deals – and even families – fall apart when thanks to a direct investment gone bad.  While direct investment can be an exciting and lucrative tool to build and maintain your family’s wealth, if you’re just starting out, you’ll want to avoid these rookie mistakes:

1. Not Aligning Investments With The Family’s Strategy
Not every investment is a good fit for your family office.  Don’t compromise your family’s reasons for investing or its strategy to chase a deal that doesn’t support the long-term vision.

2. Lacking a Family Strategy Altogether
What?!?  You don’t have an investment strategy?   No one knows the goals for your FO? That’s family office 101, and it’s one of the most important things to get right.  You’re not a rookie, you haven’t even made the team. You need clear and concise reasons for investing and a guiding strategy of how to get it done.  And you need the rest of the family onboard.

3. Being An Uninformed Shopper
Be aware of what you get for your budget.  Don’t expect full voting rights and a couple of board seats for a $50k investment in a $50M company.  You get what you pay for, and rookies often expect more than their fair share.

4. Executing Sloppy Deals
This is not your iTunes end-user agreement.  Don’t blindly click ‘accept’ and write a check.  Due diligence is crucial. Know what you’re getting into and document the terms.  It’s particularly tempting to skip this step for friends and family deals. Protect yourself, your money and your relationships.  Put it in writing.

5. Wanting to Know EVERYTHING
Wait, did you go too far the other direction?  While you don’t want to consummate a deal without due diligence, you’ll need to stay focused.  No deal is perfect. Experienced investors have clear criteria for deals. They apply the criteria, make a decision and move on.  

6. Using Family Lawyers and Accountants
Your family’s accountants are great at minimizing your tax burden and your lawyers kick ass at protecting you from any possible downside, but they’re probably not seasoned dealmakers.  If you want to play in the big leagues, you need counselors with relevant experience and relationships.

7. Requesting Non-Standard Deal Terms
Don’t use deal terms to fix every wart due diligence uncovers.  This is a key reason many bankers and VCs don’t want to mess with family offices – especially rookies.  Try to make decisions based on the deal at hand, and if you can’t, maybe it’s not the deal for you.

8. Taking Too Long
Between staggering levels of due diligence and non-standard term requests, rookies often take FOREVER to make a decision.  VCs make decisions in a matter of days, and private equity deals can come together in a matter of weeks. If you want to be taken seriously, be prepared to work at their speed.

9. Being Afraid Of Missing Out
Worried all the cool kids are hanging out without you?  Don’t be. Rookies often allow their enthusiasm to cloud their judgment.  Did you get cold called from a VC with a great deal that requires a snap decision with little information?  Run. You’ll be the dumb money in the deal. Don’t be exploited by a QVC-style solicitation, especially if you’re new to direct investing.  Good deals come to those who invest in generating deal flow and leverage their experts.

10. Skimping On Measurement And Reporting
Closing your first deal is a huge accomplishment – but wait, don’t go anywhere!  Many rookies want to sign, fund and flee, but direct investments need care and feeding.  The best deals are when the investors bring more than money – strategic insight, relationships or other valuable insight to the table.  Do your part to help your new investment be successful.

Ready to avoid these rookie mistakes?  Check out our series on doing direct investing right to learn more about setting up a successful family office.

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