How can Family Businesses learn from Start-ups?

The past few years has seen dramatic rise in businesses start-ups, founded by young first-generation entrepreneurs from non-business backgrounds. These founders have bet their career and skin, so to speak: albeit aided by increased access to equity capital on an innovative idea, and the rapid growth of India’s digital audiences have played a key role. 

It’s a common scenario in lots of different small family businesses: the older generation, which often founded and/or grew the business to its current level, wants to eventually hand off the business to be operated by the next generation. However, there is tension in the succession plan itself or the different ways that the younger generation wants to operate the business. This tension often spills out into the broader business itself, causing problems in several different areas. Depending on the nature of the business, this situation can even affect customers.

Startups are structured a bit differently. Typically, there is a founder or investor-appointed CEO who is the ultimate decision maker. Aside from that, startups have a flatter organizational structure than most small businesses (we’ll elaborate on this in an upcoming section). People working at startups might have more freedom than those in a small business, but startups still have defined goals typically related to growth or revenue. There is typically a single chief executive who makes final decisions, working with a team of executives responsible for a few large departments within the company. Depending on the company’s size, there may also be managers working on specific projects within departments.

Many research studies continue showing that in a family business, the family firm’s ability to take long-term bets are higher than that of institutionally held firms. Much of its ability to grow the business or pivot the business-lines to be relevant, rests with their ability to bring in non-family C-suites as well as independent directors on its boards. The ability of business owners to separate their role of being chief executive from the stewardship role that they are expected to play as “promoter-shareholder” is crucial.

Family-owned businesses in India have the following features which distinguish them from other family businesses worldwide:

  • Family relationships play very high importance in determining the position a person holds in the business.
  • The predominance of few castes which are the connotation for family-owned businesses in India
  • All members in the business follow a presiding culture pursued by the caste to which they belong.
  • Family, relatives and extended family have a strong feeling of trust and sincerity to the family that naturally construe as trust and sincerity to the business.
  • Higher positions are more likely to be held by sons and male relatives and in succession, as compared to the female relatives.

The other challenge is attracting top-quality talent. Most family run businesses are not seen as the primary choice for professionals because of perceived growth limitations and lack of transparency or at times, even basic ambition to grow the business. Having said that, family businesses do have their own learnings and inhibitions around start-ups.

What do family businesses like/admire about the new start-ups:

  • Access to low risk non-debt capital
  • The ability to scale up rapidly and spend ahead of the curve
  • Exponential growth prospects and soaring valuations – wealth multipliers

What do family businesses dislike about the new start-ups:

  • Consistency of performance 
  • Rapid pivots of business models and strategy. Remember continuity and being steady is the hallmark of most family businesses
  • Capital infusion ahead of the curve

Today’s 2nd Gen or the 3rd Gen family members are mostly well-educated and also have the advantage of having heard business conversations at home, right from their early years. But they might have differing ideas from their previous generation. Here is where working with external advisors and mentors helps in steering the difficult conversations and different generational lingos towards a win-win outcomes. Make the family enterprise agile and consumer-centric like a start-up, but backed with decades of learnings from successes, and importantly failures. That’s the reboot family firms need.

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