Family enterprise diversified
Family enterprise diversified
The demographic reality for most business families is that their enterprise has to grow and diversify to support the needs and ambitions of a growing family.
It is all about the family
A family decides that they want a business to support their growing family up to generation three. This family ambition leads to:
- a long-term investment horizon, which is different from the return expected by other types of businesses nowadays
- a growth target for the business, which is to expand to provide the desired overall return for an increasing number of family members.
Growing the business is in service of the family’s goals and the way a family diversifies their enterprise depends on the type of family they are and what they want to achieve as a family.
The family is the emotional and economic unit that drives diversification. Clearly families want to nurture, preserve and protect their wealth but they also know that they cannot look after a growing family by maintaining the status quo.
This is a way of diversifying a family enterprise that will not make sense to other types of business, which is merely further proof that family enterprises are not like other types of business. It is where a family decides to diversify by backing the savvy in their lineage.
The decision to do this might be because the next generation does not want to take over the business started by their ancestors, but still want to remain in business together, so there is a family need to diversify. The catalyst might also be the desire to give the next generation an opportunity to pursue their own business ideas and experience establishing and growing a business. These families believe that the best way to learn about business is to run your own.
It is a clear distinction between a strategic decision to diversify by investing in a particular type of business or asset compared to investing in the interests and talents of a family.
For example, one family’s decision to invest in renewable energy had more to do with the next generation’s environmental interests than the family choosing green energy over other sectors for strategic business reasons. No doubt the family considered the financial risks of their diversification strategy but their investment was made easier because they felt more comfortable supporting the ambitions of relatives compared to investing their wealth with strangers.
Another family’s approach to diversification was to raise a fund that provided seed funding for ventures that were developing new technologies that either might be useful to the family’s core business or which could benefit from the core business’s other resources, such as access to distribution channels and international trade connections.
This was the idea of two family members who wanted independence to do something on their own while remaining useful to the core business and the wider family. Their motivation was the familiar challenge of the next generation trying to find a way to pursue their own aspirations while dealing with their feelings of loyalty and duty to their family.
While family members were invited to invest in the fund it was agreed that the family business itself would not be an investor. It did however, support companies in which the fund invested, with infrastructure including incubator premises and access to the business’s network of contacts. If any of the investees produced technology of use to the family business it would seek to obtain a licence or even acquire the start-up, both on arms’ length terms.
By doing this the family helped the business outsource some research and development through ventures supported by a fund that was started by family and supported by family who saw this as a good investment opportunity.
Ultimately, success or failure comes down to how well the family identifies and orchestrates their resources of financial, human and social capital.
This is an edited version of an article first published in The wealth.