The Confluence of Opportunity and Alignment

The current moment is particularly opportune for entering the biotech sector. After a post-pandemic period of correction, the market is demonstrating renewed vigor and sustained momentum. Venture capital investment in life sciences surged in 2024, marking it the third most active year in history by aggregate deal value, a trend that has continued into the first quarter of 2025. Looking forward, the global biotechnology market is projected to expand at a compound annual growth rate (CAGR) of 13.6% through 2034, reaching an estimated value of $5.85 trillion. This is not a fleeting trend but a fundamental, long-term driver of economic expansion.

Family offices are uniquely positioned to capitalize on this wave. Data shows that family offices are already leaning heavily into private markets, with 89% investing in venture capital, compared to just 44% of other institutional investors. This structural preference is driven by a desire for higher returns, greater control, and more direct participation in value creation. Within this allocation, biotech and health tech consistently rank as top areas of interest, reflecting a recognition of their transformative potential.

Beyond the financial metrics, biotech resonates deeply with the multi-generational mandate of a family office. It is the quintessential patient capital asset class, requiring a long-term investment horizon that aligns perfectly with the goal of building a lasting legacy. Furthermore, investing in biotech offers the potential for profound societal impact, allowing a family to contribute to the development of life-saving therapies and improve global health outcomes. This mission-driven aspect can be intensely personal, often stemming from a family's own experiences with illness, and provides a powerful "why" that transcends pure financial return.

The Central Challenge: The Expertise Gap

Despite this powerful alignment, a significant barrier remains: the expertise gap. Biotechnology is an intensely technical field where success is predicated on a deep understanding of complex science, intricate intellectual property law, and labyrinthine regulatory pathways. Most family offices, while possessing immense financial acumen, lack the internal resources—the PhDs, MDs, and regulatory experts - to confidently vet these opportunities. This gap creates a risk of mispricing opportunities, or worse, falling victim to adverse selection, being shown deals that have already been passed over by more knowledgeable investors.

This challenge is magnified by the current market structure. The robust funding environment has led to a "flight to quality," where a large portion of capital is being concentrated into fewer, more mature companies in what are termed "megarounds". While these de-risked assets may seem more attractive to a risk-averse family office, access to these highly competitive deals is typically controlled by a tight-knit syndicate of specialist venture capital funds. An unadvised family office attempting to invest directly is unlikely to even see these top-tier opportunities. This reality underscores a critical point: navigating the biotech landscape successfully is not just about having a scientist to interpret a clinical paper; it is about having a credible, networked partner to gain access to the right deals and to provide the sophisticated diligence required to make informed decisions. This playbook is designed to bridge that gap, providing a clear framework for building and managing a biotech allocation in a disciplined, strategic, and pragmatic manner.

Part I: Architecting Your Approach – Three Models for Biotech Investment

Constructing a biotech allocation requires a foundational decision on the investment model. There is no single "best" approach; the optimal strategy depends on a family office's specific objectives, risk tolerance, desire for control, and available resources. The three primary models—direct seed investing, co-investing with specialist funds, and structured venture secondaries—exist on a spectrum. Understanding the trade-offs of each is the first step toward building a successful program.

1. The Entrepreneurial Bet: Direct Seed Investing

The "Why": Direct investing represents the highest-control, highest-impact, and highest-potential-return approach. It allows a family office to write a check directly into a promising early-stage company, taking a significant equity position and often a board seat. This model is particularly appealing to entrepreneurial families, especially those with first-generation wealth, who wish to be hands-on, apply their operational expertise, and actively guide a company's growth. It offers the allure of getting in on the ground floor of a potentially world-changing technology, such as a new gene therapy or a novel cancer treatment. A significant motivator is also the ability to bypass the "2 and 20" fee structure of traditional venture funds, which can meaningfully enhance net returns over the long term.

The Reality: This path is fraught with peril and is the most resource-intensive of the three models. The risk is stark and binary: industry data consistently shows that approximately 90% of drug candidates that enter human clinical trials ultimately fail to reach the market. This is not a traditional investment risk that can be diversified away easily within a single deal; it is a scientific and clinical risk of complete capital loss. Beyond the risk, the operational burdens are immense. Family offices consistently cite sourcing high-quality deal flow as one of their biggest challenges in direct investing. Without a specialist network, it is difficult to access the most promising opportunities. Furthermore, conducting the necessary due diligence requires a level of scientific, intellectual property (IP), and regulatory expertise that is rarely found in-house. Finally, successful direct investing is not passive; it requires active post-investment support, including providing strategic guidance, making introductions to key talent, and helping navigate the long road to commercialization.

FO Profile: This strategy is best suited for family offices with a very high tolerance for risk and a "wealth creation" rather than "wealth preservation" mindset. It fits families with a deep passion for a specific disease area or technology, a strong desire for maximum control and influence, and a clear-eyed willingness to invest significant capital not only in the company but also in the external advisory support required to properly diligence and manage the investment.

2. The Strategic Partnership: Co-Investing with Specialist Funds

The "Why": Co-investing has emerged as a powerful hybrid model that offers a pragmatic solution to many of the challenges of direct investing. In a co-investment, a family office invests directly into a company alongside a lead investor, typically a specialist life sciences venture capital fund. This approach immediately solves the problem of deal flow and access, as the family office can "piggyback" on the opportunities sourced and vetted by an expert manager. It allows the FO to be more selective, concentrating capital into a few high-conviction companies rather than committing to a "blind pool" fund where they have no say over the individual investments. This targeted approach provides more direct exposure while still benefiting from the diligence and oversight of a professional. A major draw is the favorable economics; most co-investments are offered on a low-fee or no-fee, no-carry basis, which can dramatically improve net returns.

The Reality: While the lead sponsor shoulders the burden of primary diligence, the family office cannot afford to be a passive participant. A "confirmatory" diligence process is still essential to validate the lead's assumptions and ensure the deal aligns with the family's own investment thesis. This review must often be completed on a compressed timeline, as co-investment opportunities can be competitive and time-sensitive. The diligence focus for the family office shifts. Instead of evaluating the science from scratch, the primary task becomes evaluating the quality of the lead sponsor and the syndicate. Is the lead VC a top-tier firm with deep domain expertise and a proven track record? Are other reputable, knowledgeable investors participating in the round?. Success in co-investing is ultimately a relationship-driven game. Building strong, trusted partnerships with a handful of high-quality venture GPs is critical to ensuring the family office is on the shortlist when attractive co-investment opportunities arise.

FO Profile: This model is ideal for the family office seeking a sophisticated balance between direct control and expert leverage. It is for investors who want more targeted exposure to specific companies than a fund-of-funds can provide but who also recognize the limitations of their own internal capabilities to source and lead deals. This is the quintessential "smart-follower" strategy, allowing the family office to learn from and invest alongside the best in the field.

3. The De-Risked Portfolio: Structured Venture Secondaries

The "Why": The venture secondary market offers a compelling solution to two of biotech's biggest challenges: long timelines and high failure rates. Instead of investing in a seed-stage company with a decade-long path to a potential exit, a secondary transaction involves acquiring existing shares in a more mature, later-stage private company from an early investor, employee, or another fund. This strategy can significantly mitigate the "J-curve" effect—the initial period of negative returns typical of primary fund investments—and accelerate the timeline to liquidity and distributions. In a market where the IPO window can be unpredictable and companies are staying private longer, the secondary market provides a crucial liquidity mechanism. This creates opportunities for new investors to acquire stakes in de-risked, often well-known companies, frequently at a discount to the valuation of the last primary funding round.

The Reality: Secondaries are not a simple shortcut to success. The diligence required is different but no less rigorous. The focus shifts from binary scientific discovery risk to complex financial, legal, and structural risk. A forensic audit of the company's capitalization table, shareholder agreements, and preference stack is required to understand the true economic value and rights associated with the shares being purchased. There is significant information asymmetry to overcome; the buyer must understand why the seller is exiting. Is it a simple need for liquidity, or is it a signal of a problem at the company?. Transactions can be broadly categorized as LP-led (buying a limited partner's stake in a venture fund, which provides diversification but less visibility into individual assets) or GP-led/direct (buying a stake in a specific company, which offers more clarity but is often a smaller, more targeted opportunity).

FO Profile: This approach is a strong fit for more conservative family offices whose primary mandate is wealth preservation. It is well-suited for those who are more risk-averse, wish to mitigate the J-curve, and desire faster capital recycling. It also serves as an excellent entry point for investors new to the biotech asset class, as it allows them to build a portfolio with a much clearer view of the underlying assets and their progress toward key milestones.

The choice between these strategies is not a simple, linear progression of risk. Each path presents a different type of risk. A direct investment carries immense scientific risk. A co-investment introduces sponsor risk - the risk that the lead investor, while expert, may be wrong or that their interests are not perfectly aligned with the family office's. A secondary investment carries significant

information asymmetry risk - the risk that the seller knows something the buyer does not. A sophisticated biotech allocation, therefore, requires a partner who can assess and mitigate all three types of risk, acting as a holistic risk manager, not just a scientific consultant.

Part II: The Diligence Spectrum – Calibrating Your Scrutiny

Once a family office has selected an investment model, the next critical step is to execute the appropriate level of due diligence. The depth and focus of this scrutiny must be calibrated to the chosen strategy. A one-size-fits-all approach is a recipe for failure. For a family office without a full-time science team, understanding the distinct roles of the internal team and the external advisor is paramount to de-risking the investment process effectively.

Diligence for Directs: The Deep Dive

Direct investing demands the most comprehensive and multi-faceted diligence process. It is a true deep dive where the investor must validate every aspect of the company, from the foundational science to the commercial market.

• FO's Core Role (The "Un-delegatables"): While technical diligence can be outsourced, the assessment of the human element cannot. The family office principals and investment team must take the lead in evaluating the founders and the management team. Key questions revolve around character, resilience, and vision. Are the founders coachable and open to feedback? Do they have a track record of execution and the fortitude to navigate the inevitable setbacks of drug development?.20 This is also where the family office confirms alignment of mission and values. Does the company's long-term vision resonate with the family's goals for its capital?.36 This qualitative assessment is the bedrock of a successful long-term partnership.

• Advisor's Critical Role (The Technical Lift): An external specialist advisor is indispensable for conducting the rigorous technical diligence required for a direct investment. Their role is to provide an objective, independent validation of the company's claims across several key domains:

• Science & Technology: This goes far beyond reading the company's publications. It involves a critical review of all preclinical data, an assessment of the novelty and defensibility of the biological mechanism of action, and a pressure test of the overall scientific rationale. The advisor helps determine if the science is robust enough to support moving into human trials.

• Intellectual Property (IP): A strong patent portfolio is the lifeblood of any biotech company. An IP specialist must conduct a deep dive into the patent filings to confirm clear ownership, the geographic scope and term of protection, and the validity of the claims. Most critically, they must perform a Freedom to Operate (FTO) analysis to ensure the company's product does not infringe on existing patents, a common and potentially catastrophic blind spot.20

• Market & Commercial: A brilliant scientific idea is worthless without a viable market. The advisor must validate the size of the unmet medical need, analyze the current standard of care, map the competitive landscape, and assess the potential reimbursement pathways. This ensures the product, if successful, has a clear path to commercial adoption.

• Regulatory & Clinical: Founders are often optimistic about timelines and costs. An experienced advisor provides a realistic assessment of the regulatory pathway to FDA (or other agency) approval. This includes mapping out the required clinical trials, estimating their cost and duration, and identifying potential regulatory hurdles.

Diligence for Co-Investments: The Confirmatory Review

In a co-investment, the diligence burden is lessened but not eliminated. The process shifts from a deep dive to a focused, confirmatory review designed to leverage the work of the lead investor while still protecting the family office's interests.

• FO's Core Role: The primary focus for the family office is to diligence the diligencer. The evaluation of the lead investor is paramount. Does the venture fund have deep domain expertise in this specific therapeutic area? What is their track record of success with similar investments? Who else is in the syndicate, and are they reputable, knowledgeable investors?.20 The family office must also thoroughly understand the deal terms, their rights as a co-investor, and ensure their financial and strategic interests are aligned with the lead.

• Advisor's Critical Role: The advisor acts as a rapid-response "second set of eyes." Given the often-compressed timelines of co-investment opportunities, the advisor's role is not to re-do the entire diligence process but to efficiently pressure-test the lead investor's diligence memorandum and investment thesis. They focus on identifying potential gaps or weaknesses. Key questions include: Did the lead's FTO analysis miss a potential competitor? Are their commercial projections for market penetration overly optimistic? Is the proposed valuation justifiable based on recent comparable deals? This is a high-leverage activity focused on efficient risk mitigation and providing the family office with the confidence to make a swift, informed decision.

Diligence for Secondaries: The Forensic Audit

Diligence for secondary transactions is a different discipline altogether. Scientific risk is typically lower, as the company is more mature, but it is replaced by significant financial, legal, and structural complexity.

• FO's Core Role: The family office must focus on understanding the context of the transaction. What is the motivation of the seller? Is this a routine liquidation by a fund nearing the end of its life, an employee seeking personal liquidity, or a sign of a deeper problem at the company? The family office must be comfortable with the proposed valuation and, critically, understand the specific rights (or lack thereof) associated with the class of shares being purchased.

• Advisor's Critical Role: This is where legal and financial specialists are essential. The diligence becomes a forensic audit of the company's structure and history.

• Capitalization Table Analysis: This involves untangling the full capitalization structure, which can be incredibly complex. The advisor must analyze all outstanding share classes, preferred stock liquidation preferences, convertible notes, and SAFEs (Simple Agreements for Future Equity) to determine the true economic ownership and model various exit scenarios to understand what the purchased shares would actually be worth.

• Valuation & Terms Review: The advisor benchmarks the proposed purchase price against the valuation of the last primary funding round, the performance of public market comparables, and recent M&A activity in the sector. They must also conduct a thorough review of the company's charter and shareholder agreements to identify any transfer restrictions, rights of first refusal (ROFRs), or drag-along and tag-along rights that could affect the investment.

• Company Health Check: While the foundational scientific risk is lower, a "red flag" review is still necessary. The advisor assesses the company's progress against its stated milestones since the last funding round, looks for any new competitive threats that have emerged, and reviews any new clinical data that has been released.

To provide a clear, actionable framework, the following table summarizes the key diligence considerations for each investment model.

Part III: The Governance Engine – Institutionalizing Your Biotech Program

A successful biotech allocation is not merely a series of individual transactions; it is a long-term program that requires institutional-quality governance. For a family office, robust governance is not bureaucratic overhead. It is a critical engine for managing risk, ensuring alignment with family values, and enabling strategic continuity across generations. Establishing a formal framework for decision-making, reporting, and conflict management transforms a collection of high-risk bets into a disciplined, professional investment portfolio.

1. The Investment Committee (IC): Your Strategic Hub

The Investment Committee is the strategic heart of the biotech program. Its structure and processes are fundamental to making sound, disciplined decisions over the long term.

• Composition is Key: An effective IC for a specialized asset class like biotech must blend diverse perspectives and expertise. The ideal composition includes key family members (to ensure decisions align with the family's mission and values), senior family office staff (such as the CIO or CFO, who bring financial rigor), and, crucially, at least one independent external advisor with deep, relevant experience in life sciences. This independent voice is vital; it provides objective challenge, fills the critical scientific expertise gap, and helps the committee avoid emotional or biased decision-making, especially during periods of market stress or when faced with a compelling but flawed story.

• Charter & Cadence: The IC must operate under a formal, written charter. This foundational document should explicitly define the committee's purpose, scope, roles, responsibilities, and decision-making authority (e.g., majority vs. unanimous vote). For a biotech allocation, a quarterly meeting cadence is a standard best practice. However, the agenda for these meetings should be structured and purposeful to ensure effectiveness:

• Q1: Focus on annual portfolio review, strategic planning for the year ahead, and setting the budget for new and follow-on investments.

• Q2: Conduct a deep-dive review of one or two existing portfolio companies, focusing on progress against scientific and clinical milestones.

• Q3: Review the pipeline of new deal opportunities and receive a thematic update from the external advisor on key trends in the biotech sector.

• Q4: Assess year-end performance against stated goals and conduct preliminary planning and capital allocation discussions for the following year.

• Investment Policy Statement (IPS): The IPS is the IC's constitution. This written document is the anchor that guides all investment decisions and prevents strategic drift. For biotech, the IPS must be particularly clear about several key parameters: the family's tolerance for the high risk inherent in the asset class, the target allocation size for the biotech program as a percentage of the total portfolio, specific liquidity constraints, and the defined criteria for making investments (e.g., preferred therapeutic areas, stages of development, or geographic focus). A well-drafted IPS is the most powerful tool for maintaining discipline through market cycles.

2. Reporting That Matters: Beyond IRR

For illiquid, long-duration assets like early-stage biotech investments, traditional financial reporting can be misleading. A quarterly Net Asset Value (NAV) or Internal Rate of Return (IRR) figure for a company that is years away from generating revenue is often a subjective and volatile metric that can cause unnecessary anxiety for principals. A more meaningful approach focuses on tracking progress against the key value-creating events in a biotech company's life.

An effective reporting template, inspired by institutional standards like those from ILPA but tailored for the family office context, should be milestone-driven. A quarterly report for each direct or co-investment should clearly and concisely track the following:

• Company Snapshot: A simple header with the company name, the date of the initial investment, and the total capital invested to date by the family office.

• Milestone Tracker: This is the core of the report. It should list the 3-5 key scientific, clinical, or regulatory milestones the company aims to achieve over the next 12-18 months (e.g., "Complete IND-enabling toxicology studies," "File Investigational New Drug (IND) application with FDA," "Dose first patient in Phase 1 trial"). Each milestone should have a status: "On Track," "Delayed," "Achieved," or "At Risk."

• Capital & Runway: This section provides a clear financial health check. It should state the company's current cash on hand, its average monthly net burn rate, and the resulting projected cash runway in months. This directly answers the most critical operational question for any venture-backed company: "When will they need to raise more money?"

• Risk Dashboard: A qualitative summary of the key risks facing the company, categorized into areas such as Scientific, IP, Clinical/Regulatory, and Team. This section should highlight any material changes in the risk profile since the last reporting period.

• Performance Metrics: While milestone tracking is primary, traditional financial metrics should still be included for long-term tracking. This includes the current IRR and Multiple on Invested Capital (MOIC), but they should be clearly contextualized as long-term, directional indicators rather than short-term measures of success.

3. Managing Inevitable Conflicts: The Transparency Tool

Conflicts of interest are a fact of life in investing, but for family offices, they can be uniquely complex, often blurring the lines between business, family relationships, and philanthropic activities. A family principal might serve on the board of a hospital that could become a clinical trial site for a portfolio company. The family foundation might fund academic research in a disease area where the family office is making a for-profit investment. These situations are not inherently wrong, but they must be managed with absolute transparency to protect the family's reputation and maintain internal harmony.

The most effective tool for this is a formal Conflict of Interest Log. This should be a living document, maintained by the family office's compliance lead or legal counsel and reviewed by the Investment Committee at every quarterly meeting. It is a simple but powerful governance mechanism. A best-practice template would include the following columns:

• Date: The date the potential conflict was identified.

• Involved Person(s): The name(s) of the family members or employees involved.

• Description of Potential Conflict: A clear, factual description of the situation.

• Nature of Conflict: Categorization (e.g., Financial, Fiduciary, Personal/Relational).

• Mitigation Steps Taken: The specific actions taken to manage the conflict (e.g., "Recused from vote," "Disclosed to board," "Independent third-party review obtained").

• Resolution/Status: The outcome of the mitigation steps.

An external advisor can play a crucial role here, offering an objective perspective to help identify potential conflicts that may not be immediately obvious to the family and providing best practices for disclosure and mitigation.

These governance structures are more than just best practices for making better investments today. They are essential tools for intergenerational knowledge transfer and strategic continuity. As family offices increasingly involve the next generation in leadership and decision-making 7, these formal processes ensure that the strategic rationale behind a 10-year, illiquid biotech investment is not lost. A clear IPS, milestone-driven reports, and transparent conflict logs allow future family leaders to understand the "why" behind past decisions, enabling them to act as effective stewards of the portfolio and make informed choices that honor the original intent while adapting to the realities of an ever-changing market. This elevates the role of governance from a compliance exercise to a cornerstone of legacy preservation.