By Kavil Ramachandran,
Family businesses are undergoing a quiet revolution with a significant number of new start-ups set up by the younger generation of business families. This is an excellent trend, especially when product life cycles are shortened by multiple forces of disruption. However, with the demise of joint families and the disappearance of joint ownership of everything, entrepreneurial initiatives of family members have raised a new set of challenges for family businesses.
Some of the major areas of dilemma emanate from the societal evolution into predominantly individualism-driven nuclear families from one driven by collectivism, as in joint families. A major question is to decide the ownership of the start-up between the initiator and the family, which is also influenced by the source of funding: whether it is the common family pool or the individual entrepreneur’s personal or parental money. Some of the other sources of dilemmas revolve around the management of the venture: who all have a say in it, how the entrepreneur gets rewarded, what happens to the individual if the venture fails, and also what mechanisms should be kept to prevent silos. It is important to recognise and explore options to address them proactively and avoid the effect of 5Ds (dilemmas, deviations, differences, disputes, and destruction).
Addressing dilemmas
Ideally, all start-ups driven by family members must be owned by the family itself, disregarding their relatedness to the existing business and who the originator of the idea is. However, to encourage entrepreneurship, some families allocate a token “sweat equity” of 5-10% to the family entrepreneur, retaining control with the family that is making the entire investment. Some families maintain a separate venture fund under its family fund.
The entire process of venture creation, starting from idea validation to funding decision, terms and conditions, and review must be done like a stand-alone venture capital firm with firmness and fairness. This is easier said than done, especially if there is parental interference to protect their wards from any kind of failure. This is where a strong decision-making entity such as a family business board or an owners’ council with a couple of non-family professionals on board helps. What makes family policies work is complete respect for the policies and processes and members restraining from the temptation to bend them to personal advantage. It is notable that some of the well-governed families do not hesitate to pull the plug on start-ups that are not making any progress. Such families recognise that ventures may fail, but not the entrepreneurs! Entrepreneurial families value the start-up experience of their members very highly, whether the venture takes off or not. The opportunity to test out venture creation capabilities and learn from the experience stand in good stead in preparing the individual as a corporate manager.
One of the biggest long-term implications of venturing is the danger of silo formation in the family. Entrepreneurs passionate about their start-ups are likely to be more (or only!) worried about their “babies” at the cost of taking care of all “family babies”. This requires regular re-dedication to the family’s purpose of doing business together with rewards tweaked accordingly. In one instance, there is a specific expectation set for next-generation members to devote their time and mind equitably across their “own” ventures and those of the family. Close supervision, reminding entrepreneurs about their goals beyond the start-up, and overall mentoring are important to avoid the creation of what is called a “perforation model”.
One of the best ways to avoid silo formation is by limiting the family entrepreneur’s role to pre-start-up to early growth stages. Other experienced professionals, from the family or otherwise, will be able to build the venture through the growth stages. The entrepreneur can either continue as a serial entrepreneur and move on to set up another new venture or take up some other responsibilities, but not operate the start-up further.
Family business as incubator
Fundamental to any start-up’s success is the support and facilitation provided by high-quality mentoring. In most families, this is easily and freely available from senior members and well-wishers. In fact, high-quality mentoring by a close well-wisher can make all the difference in a start-up’s journey.
In that sense, the family business is one of the best incubators as well as accelerators for start-ups to sail smoothly. This is not often recognised although family businesses are no longer considered change-resistant and unprofessional. Families need to refine their governance practices and bring start-up venture funding to the core. They need a separate venture capital fund and should consider family-initiated venture investment as part of their wealth management portfolio, as is done by some reputable multi-generational family businesses. This will be the next evolution of family business as entrepreneurial families. However, it is important for them to remember that it is not the same as running an existing business. They must build both attitude and expertise in start-up incubation.
In essence, family businesses can and should become the next hotspot of start-ups. Aggregated family business incubators and accelerators across families that are managed professionally can be a major change agent. Family wealth may be directed to such venture funds that can tap into the expertise from various sources.
The author is professor and senior advisor, Thomas Schmidheiny Centre for Family Enterprise, Indian School of Business.
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