SAN FRANCISCO – While the past decade has seen the rise of money from family offices into direct investments, a lack of knowledge and expertise has kept many of those funds on the sidelines when it comes to the health care sector. But the ones willing to take risks on innovative prospects could help young firms bridge the gap between an idea and a much-needed inflection point.

Family offices – firms that serve super-wealthy investors often seeking long-term wealth-generation strategies – are one of the fastest-growing investor segments in the U.S., said Colin Widen, CEO of Boston Innovation Fund, but there aren't many investing in life sciences for a simple reason: It's hard to think of a riskier asset than a biotech product, he told the audience during a panel at the Redefining Early Stage Investment meeting.

Plus, life sciences investment for a family office usually involves a relatively small allocation, "but it takes so much bandwidth," he said. "You need so much expertise for a very small slice of an overall portfolio."

That said, there are family investors to be found, some of which use the investment strategy to have an impact on disease areas that have affected family members. Broadview Ventures, for instance, focuses its investments primarily in cardiovascular, metabolic disease and stroke, said Chris de Souza, director. Beyond that, the fund is technology-agnostic, with investments including drugs, devices, diagnostics and regenerative medicine.

Broadview is "not a family office, per se," de Souza said. But it is backed by a family foundation, the Leducq Foundation and its supporting trust, which was created in 1996 by Jean and Sylviane Leducq from the sale of the family's linen and uniform services businesses. Since its first award in 1999, the foundation has committed more than $350 million to research in the cardiovascular and neurovascular space.

The fund employs a team of six, including de Souza, a 20-year biopharma veteran, which conducts due diligence. That makes it a "philanthropic investor," since Broadview deploys philanthropic dollars to get companies started and accelerate translation, de Souza said.

"Everyone wants innovation without risk, so our goal is to derisk that investment as much as we can," paving the way for the next investors to come aboard, he said.

Companies seeking funds from Broadview must have profitable business plan – "we're not looking to give money away," he added – but the fund is willing to invest in technology that offers innovative, high-impact potential.

Family funds also offer the chance for wealth-generation strategies that are long-term, which would work with the timelines typical of the biopharma industry.

Cato Bioventures, for instance, started investing in gene therapy in 2000. "We're finally seeing early results," said Lynda Sutton, principal and co-founder.

Launched in 1988 as the venture capital affiliate of Cato Holding, a privately held family fund, has built a portfolio of firms, including those developing therapeutics, medical devices and stem cell therapies. It invests in firms at all stages of development and across multiple therapeutic areas, and its funds have gone into both public and private firms. Cato Bioventures offers a two-pronged approach to its investments, said Sutton, who, like de Souza, is another pharma veteran. The first is to look for technology "that needs a home, bring it in and form a company around it," with the aim of getting it to a value inflection point. The second involves looking for companies with good management, promising technology and invest money and resources to complement drug development efforts.

The Stetson Family Office, started nearly a century ago by Eugene W. Stetson shortly after he led the buyout of the Coca-Cola Co. through a public offering. In 2017, the family office launched the Healthcare Impact Foundation, a 501-c-3 organization to invest in life sciences firms, and the family office is now run by Chuck Stetson, Eugene's grandson, an entrepreneur, venture capitalist and philanthropist.

Among the Stetson's Family Office's areas of interest include preventive health, and the office also is setting up a Global Family Office Bioforum to establish offices around the world that can work closely with local health care innovators.

PBM Capital Group, meanwhile, seeks to help entrepreneurs get to the next stage of investment, said its senior vice president of business development and portfolio management, Jayson Rieger, who came to PBM following stints in scientific and executive leadership roles in biopharma.

Initially founded to manage health care-related investment of Paul B. Manning and his family, PBM's offerings include investment evaluation, deal sourcing and providing technical and business support to its portfolio companies. "We help companies go from preclinical to phase III in less than two years," Rieger said.

PBM also aims to "take capital-raising out of the hands of the entrepreneurs," he added, calling it a "big waste of their time and not their core competence. . . . We help them by filling in the gaps."

Not just dollars

Perhaps the biggest challenge for family offices is a lack of expertise in some firms. Venture capital firms typically don't share due diligence, Stetson noted. The whole point of creating the 501-c-3 operation in his family's fund was to allow it to share information so programs can be properly derisked.

He pointed to diagnostics firm Theranos Inc., whose early investors included Rupert Murdoch as well as Cox Enterprises Inc., a family-controlled firm, before reports surfaced that the company may have been overselling the capabilities of its blood testing products.

"A lot of the initial funding isn't very smart," Stetson said.

Broadview also is willing to share its due diligence. A lot of family offices are more accustomed to operating in areas such as real estate, retail and petrochemical and "they really don't understand the life sciences model," de Souza said. "We don't want them to make a bad decision" that could drive them out of the sector altogether.

The good news is that more family offices are starting to work with each other.

"The ecosystem is changing," Stetson noted, pointing to angel investors who are getting adept at bringing family offices together, and the rise of accelerators also are helping to draw more interest to the sector and putting potential investors in touch with the right facilitators.

Syndication is important, de Souza added. "You want to make sure you're getting in bed with the right partner." And investors "are not just dollars; you want to get expertise from them."