By Robb Lifferth | Posted - Dec 14th, 2021

 

 

 

 

Investor Mindset: A Conversation with Frazier Group’s Family Office

Discussions around startup financing are often dominated by venture capitalists. A lesser known but important segment of the venture ecosystem are family offices; private investment groups run by the independent and intergenerational efforts of a founder’s family. Supported by institutional-level of capital and robust, impressive portfolios, family offices are often seen as entrepreneur friendly, flexible, and long-term investors. Family offices are also the fastest-growing investment segment in Utah and an especially attractive option for young companies seeking Seed, Bridge, and Series A funding. They’re also the next topic for TechBuzz’s Investor Mindset interview series. 

To understand how family offices invest in startups, it helps to first know how they’re built. A family group is established when a founding family member has amassed a large amount of capital, often through a liquidity event. These funds are paid into a consolidating structure to hold the family assets, which enables better governance as the capital is managed and deployed. Family offices manage traditional asset allocations such as bonds, real estate, public stocks, and alternative investment funds such as Private Equity and Venture Capital. Most family offices also set aside capital for charitable giving. 

In recent years family offices have started investing more heavily into venture investing. The move to the venture investing world is often driven by younger, tech-savvy family members who are willing to take a more hands-on approach to investments in startups. Direct venture investing also allows seasoned operators to revisit their venture days by serving as advisors and consultants as they build their venture portfolio. 

There are an estimated 7,000 family offices in the U.S. managing more $100 million each and a combined total of more than $1 trillion dollars. Some estimates put this number at over 10,000 U.S. family offices and growing.

With its focus on generational wealth management, the term “family office” may conjure up aristocratic images of the Rockefellers and Vanderbilts, but in reality the modern family office is agile, sophisticated, and hard working. In Utah, one such family office that has distinguished itself in the venture market is the Frazier Group. The Frazier Group has become an attractive investment option for dozens of Utah entrepreneurs looking for late-stage Seed, Series A, or Growth capital.

Frazier Group, headquartered in Lehi, Utah, sources deals throughout the Mountain West. Frazier Group has earned a reputation among Utah entrepreneurs for being easy to work with, providing a strong value-add network, and making quick decisions. Founded by Scott Frazier in 1995, the office has evolved into what many consider the state’s premier firm. The family’s staunch work ethic and exacting approach has driven over $250 million in invested capital across an 80-company portfolio (45 added since 2018), with 7 IPOs and 28 acquisitions. They’ve directly financed many of Utah’s leading tech companies including Ancestry, Homie, Omniture, and Degreed, and operate as limited partners across venture firms like Kickstart, Album, and Peterson Ventures

Frazier Group is a culmination of Scott Frazier’s legacy. He co-founded Utah Angels in 1997, committed full-time (even working directly for companies) to incubate ventures like TruHearing and TruVision, which he has since exited to establish his family office, along with his son-in-law and two sons. 

TechBuzz recently sat down with David Frazier (Managing Partner), Kendall Frazier (Partner), and Liv Gheciu (Partner) to discuss the strategy and benefits of financing by family offices. Emphasizing the importance of precise yet long-term vision, reputable business practices, and fastidious risk management, the Frazier Group partners offer insight into their investment principles for helping young companies succeed. These are three takeaways from TechBuzz’s hour-long discussion.

Note: Along with venture investments, Frazier Group also handles Secondaries through a venture capital fund they operate called Frazier Fund III: the purchasing of stock from a company’s officers, former employees, and early investors looking to cash out their equity. This is a unique structure for a family office; we touch on this topic later in the article.

Frazier Group Offers a Meta View of the Investment Scene

Family offices often have diverse and difficult to define investment strategies. In contrast, Frazier Group stands apart from most other family offices with their well- executed and laser-focused investment thesis on Utah technology startups. Frazier Group’s ability to analyze an opportunity that meets their investment formula and provide a quick investment decision makes them a highly desirable co-investor. Their agility has earned them a good reputation for cooperating well with other investors while being highly supportive of the entrepreneur. 

Diplomacy is an important skill to source and structure any deal, and Frazier Group is especially adept at playing well with others. “We’re the Switzerland of Utah investing,” explains David. “We fill in the gaps of financing. We offer flexibility, we follow leads, we’re easier with percentages and allocations. We focus on generalities like revenue and sound structure. Our standards are exacting, but we don’t need sharp elbows to run our investments successfully.”

As discussed in our previous interview with Diogo Myrrha of Album, it’s also typical for VCs to be rigid with their investment terms. Frazier Group, on the other hand, can adapt to initial leads by other parties. 

“Once we have conviction in the founders and the company’s long-term competitive advantage,” says David, “we’re free to work creatively on the ‘formula’ of a deal. For example, we often help companies with bridge rounds—writing checks when a company is looking at a higher valuation down the road but needs the cash to get there. If the entrepreneur takes VC money in a broadly marketed financing, they’ll dilute a large fraction of their ownership. In contrast, Frazier capital doesn’t dilute as dramatically.”

Frazier Group’s portfolio is built on conviction in disruptive, market-leading companies that can maintain an advantage over competitors. Fraziers prize competitive moats like software and proprietary technology, and tend to undervalue branding or recent revenue growth. They pivot their funds easily, sometimes participating only during a small financing window, other times doubling or tripling down on companies that prove viable in the long run. “We’re always tuned in to the big picture,” says David. “Our guiding philosophy never extract too much value from any interaction, and convert goodwill we earned early on into opportunities to triple down on investments later.” 

Family Offices Can Be More Nimble than VCs

Since family offices manage their own money, the partner politics are different from a VC’s. “There’s always a ‘look bad’ risk for a VC, where a break from orthodoxy exposes them to criticism from their partners and investors,” explains David. “Our family office can take risks and accept losses easier because we have no outside investors to appease. For example, we invested in Jet Dental in February 2020 just before COVID disrupted their sales process. We recognized COVID as a temporary setback to a great long-term opportunity, and aggressively piled into their next financing. We might have missed it if we’d been worried about investing contrary to temporary revenue trends.”

Family ownership and a flexible schedule allows Frazier Group to be quick and decisive with their funds. “We can sign a deal and get a check written in two weeks,” Kendall notes. “If a company has a cash crunch and a lag in revenue, we’ll get them going quickly.”

Just as no two families are the same, no two family offices are exactly alike. Frazier Group is among the most prolific. “Volume-wise, we have one of the largest portfolios in Utah,” says Kendall. “We always have cash for deals, and we source through relationships—founders who know we’ll be a good actor. Our best deals are referrals, and companies where we can secure the right to participate in their Series A, B, C, and onward.” 

The group’s approach has led to diverse investments, from SaaS and work technologies to direct-to-consumer products. “Kizik was unique, for example. We didn’t think we’d be investing in a shoe company,” David and Kendall explain. “During this round, they were only offering 5% ownership, which is too small for a traditional VC. But we determined they had strong intellectual property protection, partnerships with major shoe manufacturers, and meaningful licensing deals—basically a long-term, defensible position in the market. VCs had to pass on that round, but it made sense for us.” 

Co-Investing Among Family Offices Can Provide Investment Amounts Equivalent to Those of VCs

There are at least a dozen Utah family offices regularly investing in early and mid-stage tech companies. Frazier Group explains that while some of these offices prefer to invest solo into smaller deals, the majority share deal flow and co-investment opportunities. This allows them to diversify while funding a substantially larger round for a company. 

Frazier Group Values Honest Dialogue, Clean Terms, and Long-Term Relationships

Pitch-wise, the Frazier partners emphasize explicit communication and the long-term viability of the venture. “When meeting with a potential client, we look for a presentation that isn’t inflated, let alone dishonest,” David and Kendall explain. “It’s our business to take risks. As investors, we’re exacting: we kick the tires, check under the hood, look for what a startup isn’t telling us. If a founder misrepresents their product or exaggerates partnerships, that’s a big red flag for us. We’ll only jump in with both eyes open.”

In return for an entrepreneur’s honesty, the Fraziers uphold a philosophy of constructive feedback and precise deal terms. “We’ve come to understand how hard it is for founders to navigate their investor options, whether VC or family office,” David admits. “Sometimes investors hold back on giving honest feedback on a deal, even to explain why they’re not interested. They want to keep playing, they want to be nice, no one wants to close the door on something that could be big down the line—these can make the venture conversation vague and often counterproductive. At Frazier Group, we try to add value to a startup’s contact with us, even if we don’t write a check for that round.”

David offers helpful insight on “rejection” rounds for entrepreneurs: The more willing a VC or investor is to offer criticism or feedback, the more likely you’ve got a viable vision or product. “If an investor engages with your pitch—even with advice and criticism after saying ‘no’—it’s likely your startup is on the right track,” he explains. “As a founder, I’d be more worried if I was only getting vague, semi-positive feedback with zero deals. That’s more indicative that your idea or product doesn’t have real potential to attract investors.”  

As for terms, the brothers agree the modern expectation is to facilitate a clean deal structure. “The fewer strange caveats, the better,” says David. “Things like dividends, participating preferred, uncapped notes, and discounted rounds—those are not ideal. The amount of dilution we’re causing a company is small enough; they just need to set a round, figure out what’s fair, and move forward with the partnership. That’s when our involvement is most productive.”

A Brief Summary of Secondary Acquisitions by Frazier Fund III

Beyond initial financing and bridge rounds, Frazier Group operates on Secondaries: the purchase of pre-existing investor commitments in the complex world of private equity. The Fraziers' good reputation and flexibility has given them unique access to the often opaque market of company secondaries. “Unlike traditional VC’s who typically pick up Secondaries in their own portfolio, Frazier Group’s flexibility allows them to seek secondaries in any attractive company” says Liv.

“Our Secondaries approach is to connect with sellers and help them convert illiquid, risky assets into a better personal use--whether that be paying off a home mortgage, or investing in the seller’s new startup,” says David. “Every offer we make is subject to a Right of First Refusal by the company and their major investors, so to end up with stock we have to outbid several savvy, well-informed groups. Sellers are often non-current employees or early investors; sometimes they reach out to us, sometimes they’re a referral, and other times we make first contact. These shareholders are legally entitled to information from the given company, which allows us to access what we need. In turn, we do our research and due diligence, make an offer, and close the deal—usually within a month, start to finish.”

Secondaries have historically been facilitated by an insider or trusted partner, and the company does what it can to minimize bids and close deals quickly. “No company wants outsiders mucking around in their confidential business, extracting time and value and competing with their narrative,” explains David. “They don’t get a single dollar from a Secondary, so they want to get it done quickly, on good terms with good actors. That’s the standard and reputation we uphold at Frazier Group.”

As with their approach to direct funds, Frazier Fund III relies on referrals, relationships, and solid networking to acquire Secondaries. “We’re often directly or indirectly (through a VC) involved in a company where we buy secondaries. For instance, we became acquainted with an opportunity at HireVue through one of their early investors who vouched for our reputation,” says Kendall. “We’re a known entity and we’re not going to make trouble. We work toward a transaction that leaves the buyer, seller, and company feeling like it’s something they would repeat.”

Final Insights

The partners offer final insights for founders navigating the world of venture capital. First, learn the industry’s nuances by working at someone else’s startup. “Learn a lot, build your skills, and make connections in the entrepreneurial realm,” the brothers agree. “Look at what’s broken at your current role and what needs to be fixed instead of trying to reinvent the wheel.”  

The second piece of advice: Start soft-pitching 3-6 months before you actually need funds. “If you can present a cool idea to a VC or family office and take constructive feedback, you’ve set yourself up for a solid deal,” says David. “Build relationships with potential funders before you actually need them. Warm relationships are worth their weight in gold.”   

Third, pick a financing partner, the VC or family office, that has demonstrated the ability and willingness to provide follow-on funding for portfolio companies requiring a pivot or other unexpected cash need. The right funding partner can give you numerous examples of having stood by their companies under stress. 

Lastly, build a story of success by right sizing pre-seed and seed stage valuations. “One common pitfall is to shoot for very high valuations in the early rounds, which increases the risk of having a flat or down-round at the Series A”, explains Liv. “Instead, set yourself up for a story of high valuation growth by anticipating a realistic Series A valuation based on a multiple of revenue and work backwards to the seed and pre-seed valuations. “

 
Robb Lifferth
About the Author

Robb Lifferth - Husband to Carlie, father to 4 amazing kids. Robb has worked in the Utah start-up world for nearly 20 years. Robb believes that by putting people first, the business world will be a better place. Robb is also the Co-Founder of TechBuzz.News as well as Co-Founder AltaScout. Robb is passionate about advancing other people's careers and is constantly thinking about new ways to advance how we find talent in this world.

 

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