Family businesses and startups: an uneasy relationship
Family businesses need innovation, and startups need strong partners. A match made in heaven, but there are reasons why it isn't so easy. Can the next generation make a difference?
Photo by Sam Moqadam on Unsplash
Many family businesses are sitting on a lot of cash, and rightfully so: They remember the financial crisis and have learned the lesson that being overly reliant on banks will get them in trouble. At the same time, the often-repeated mantra that they need to get ready for a digital age rings hollow for them: if they didn’t constantly innovate they wouldn’t have been around for several generations. Working with startups isn’t seen as a top priority; getting more efficient in their core business is.
The next generation might see things a bit differently. They realize that many of the world’s most successful companies were founded less than 20 years ago. For them, technology isn’t something new; it permeates their lives. They might have friends or acquaintances who became successful founders, and working in a startup certainly looks cooler than more stable career paths. But if they have the urge to play with new ideas or even join a startup, they know that there will be pushback from their families. There are unspoken rules of what you can and should do as the next generation.
It’s a paradox. Even the oldest business started small. All the generations that followed have been revering the founders of family businesses. They praise their foresight and business acumen. “Grandfather said one should take risks, but not bet the company.” Such quotes are often repeated. With the increasing success and age of these businesses, however, protecting what has been achieved becomes more important than taking risks. The desire of the next generation to prove themselves and build something new clashes with this defensiveness.
The balancing act
In theory, the next generations that are active in their family business but haven’t taken over the reins yet are incredibly well-placed to champion working with startups in their firms because of their position. To understand this point, we need to look at how companies that already invest in startups organize their activities. Scouting and assessing startups is a very specific skill, and many companies bring in outsiders to lead these activities. But if the goal of collaborating with startups is to transfer knowledge and foster innovation, there has to be a strong internal sponsor of the startup that knows whom to involve, how to speak to different departments, and whose voice carries weight. It’s not impossible for outsiders to achieve this position — when they become insiders after a few years and have strong backing from the top. But a family member in this position can be a strong sponsor right from the start, simply because of the family ties. The scouting of startups in a field and a form of quality control can be done together with experienced outside partners.
In such a setup, the discussion about which startups to invest in can become a new focal point between the old and the new generation. It allows taking measured risks and trying radically new approaches without risking the company’s fortune. There are several arguments why this can be beneficial:
For startups in the same or adjacent industries, family businesses have internal know-how and experts that are relevant in assessing the technical and other aspects of startups.
If a family business uses or plans to use the technology of a startup, or is a supplier to the startup, an investment cements the business relationship and benefits both sides.
If a family business can write cheques from EUR 100’000 - 500’000 and brings relevant industry knowledge and network to the table, it will be seen as a “smart money” investor. This should be enough to get into competitive financing rounds of early-stage startups alongside purely financial investors (venture capital funds).
This means that building a portfolio of a dozen or more startups over the years isn’t a major financial risk for medium- and large-sized family firms and the return on investment of such a diversified portfolio should be in the range of 10%-20% per year overall — a good way to put spare cash to use, considering the alternatives.
The tangible benefits for the family business could even exceed the financial aspects, for example by working with a new production technology way before the competition adopts it.
An intangible benefit of looking at many business plans to decide about startup investments is honing the skills of assessing which risks might be worth taking (and which not) and learn about new concepts before they enter mainstream knowledge.
Now, if the benefits are so convincing and clear, why don’t more family businesses do it? One reason is that outside of Silicon Valley, startup ecosystems that are strong enough to merit attention have emerged only relatively recently. A generation ago, it was unnecessary to think about this topic. But there are other reasons on the side of the family businesses that explain their inactivity so far:
A general misconception about startups in the minds of decision-makers: Consumer-facing startups get a lot more press coverage than B2B startups. Many people simply don’t know how much is happening right now that could be relevant for their family business and hence don’t know what they miss.
No blueprint: There’s a lack of clarity, examples, and information among businesses about how to start such an initiative and whom to partner with to make this approach successful.
A bad experience: There might have been an occasion in the past where a misguided investment killed the appetite for startup investments for good.
Risk aversion: It can be challenging to accept that many startup investments might turn out to be complete losses, even if they’re inconsequential, compared to the family firm’s assets, and don’t matter at all in a portfolio context.
Internal resistance: In family firms, there will always be stakeholders that strongly oppose anything they don’t understand or didn’t come up with themselves.
Overcoming such barriers is no small feat, especially in countries where risk aversion is high and startup ecosystems are still emerging. Still, the next generation of business owners is uniquely placed to change this mindset and prove their skill in picking the right startups to invest in.