A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox. Entrepreneur and family office founder David Adelman said family offices have a growing competitive advantage over venture capital and private equity firms when it comes to investing in startups. As family offices surge in number and size, with assets now totaling over $3 trillion , they’re increasingly challenging big funds for startup investments and merger deals. Adelman, whose family office Darco Capital now has more than 90 investments in private companies, said family offices can provide more entrepreneurial expertise and more patient capital than private equity or venture funds. “We’re there for the long haul,” said Adelman, the CEO of Campus Apartments and the co-founder of FS Investments. “All the funds are there when it’s 80 degrees and sunny, when things are great. But when it’s cloudy and rainy, they aren’t going to be there for you.” As a serial entrepreneur, Adelman said knows the ups and downs startups experience. Private equity and venture funds, on the other hand, are often constrained by rigid timelines and fund requirements. During Covid, more than a dozen of Darco’s portfolio companies suddenly needed capital, Adelman said. While the big funds balked at providing more funding, Darco extended low-cost lines of credit and support. “We were the last person standing,” Adelman said. “I’ve been there, you know. I’ve had some really [tough] times in my career. And if I had somebody putting the screws to me, it could have made things worse. So I’m sympathetic that sometimes things happen through no fault their own.” The billionaire entrepreneur is helping to lead a new generation of more aggressive, deal-hungry family offices. Rather than simply preserving wealth for the next generation, many of today’s family offices aim to launch new growth startups by investing directly and providing management expertise. A family office survey from Bastiat Partners and Kharis Capital found that half of family offices plan to invest in startups directly in the next two years rather than through traditional funds. Still, direct deals carry risks. Adelman said that before launching Darco, he invested in deals recommended by friends. “Friends would say, ‘Here’s a deal, put in X amount,’ so you know, it’s $250,000 or $500,000 or $1 million, whatever it is,” Adelman said. “I realized very quickly that it’s probably a money-losing prospect, to just invest in a friend of a friend’s idea or because someone at your country club is investing in it.” He launched Darco to create a formal process of evaluating startups and making direct investments. Darco’s portfolio companies range from vodka and spirits to women’s shoes, energy companies and sports teams. Along with Campus Apartments, FS and Darco, Adelman is also a limited partner of Harris Blitzer Sports & Entertainment, which owns and operates the Philadelphia 76ers and the New Jersey Devils. Adelman said he gets pitched investments every day. His first rule of thumb when choosing to invest is understanding the business and business model. “I will not invest in something I don’t understand,” he said. “I’m not looking to control someone’s business, but I have to understand it.” Rather than investing in business models alone, Adelman said he also looks for strong founders. His investment in women’s shoe company Margaux was driven in large part by his faith in the two female founders, Alexa Buckley and Sarah Pierson, who met at Harvard. “I bet on jockeys, not horses,” Adelman said. “I ask, ‘If the thing fails, would we support them again?’ To be clear, a lot of our [investments] are going to fail. Especially since we’re early stage. But we ask, ‘Are they honest or the ethical? Are their values in line with ours?'” Most importantly, Adelman said he looks for investments that will have a positive social impact — on the environment, on underserved populations or on the community, mainly in his native Philadelphia. He said his investment in cred.ai, a Philadelphia-based fintech that helps consumers build credit through a debit card, recently partnered with Starbucks and has already started improving the financial lives of its young users. “When you think about employees at these large companies, the question is what can you do as a major employer to show you care?” he said. “The easiest way to do that is with financial wellness.” Adelman also looks for companies that benefit from synergies with his other holdings. Since Campus Apartments now houses over 25,000 students, he can spot trends among young consumers with emerging products and brands. His spirits company, Darco Spirits, which sells American Harvest Vodka and Beach Whiskey, “goes well” with his sports venues and sports investments, he said. When it comes to advice for other family offices, Adelman said wealthy entrepreneurs and families should first ask themselves the hard question of whether they really need one. “There are a lot of great firms out there, multifamily offices and companies that can provide the majority of services that you may need as a family,” he said. “You can outsource it and still have a great outcome. I’m always of the notion that it’s better to rent than to buy.”
A version of this article first appeared in CNBC’s Inside Wealth newsletter with Robert Frank, a weekly guide to the high-net-worth investor and consumer. Sign up to receive future editions, straight to your inbox.
Entrepreneur and family office founder David Adelman said family offices have a growing competitive advantage over venture capital and private equity firms when it comes to investing in startups.
