Keeping the unfair advantage in the family

Turning business-owning families into business-founding families to create the next generation of winning ventures

Family businesses are powerhouses of the global economy, and yet not enough is said about their most unique challenge: keeping the family together over generations. The most time-honoured tradition of grooming the next generation to take the reins by working in the family business is losing its viability, and shifting towards the realisation that every generation has an outsized chance of being a founding generation. As it was the entrepreneurial spark which gave rise to the family’s wealth, so it can be entrepreneurialism to reignite and regenerate it, creating value by engaging their next generation and addressing the problems of today. By training Next Gen members to leverage their family’s non-financial assets rather than their finances, they can play the game they were meant to play, turn the founder’s family into a family of founders, and business-owning families into business-founding families.

Families make the world go round

When we think of the movers and shakers powering the global economy and its future, a family business may not immediately jump to mind. Yet the 500 largest family businesses generate US$7.3 trillion per year in revenue and employ more than 24 million people worldwide. In fact, this category of enterprises is collectively the third largest contributor to the world economy in terms of revenue.

It’s a wonder then why family businesses — the backbone of many countries’ economies — fall outside of 90% of conversations around business, despite making up 70% of global GDP. And that’s a crying shame, because family businesses have both unique advantages and unique problems to be addressed and solved for their sustainable success.

Not only, like any corporation, are they at risk of disruption in the long and short term, but they must also navigate the crucial issue of succession. It’s no secret that few family businesses make it to the third generation, with 70% of family-owned businesses failing or being sold even before they are passed on to the second.

Next Gen’s self-interest beats privilege

So how do we defeat this ‘curse’ and best prepare the next generation to take the reins, and even help to grow and evolve the family business? A traditional, waning approach is to groom “Next Gen” members — typically starting between the ages of 25 and 30 — by having them work directly in the family business, expanding it or developing spinoffs. This assumption that the Next Gen’s privilege makes them the best leader for the business comes with its own problems: in today’s much more global and egalitarian society, being a family member does not necessarily give you the same legitimacy with employees to run the family company as it once did.

What’s more, it seems to have become progressively harder to motivate Next Gen members to engage with the core family business, whether it’s due to their growing interests in technology and ESG that aren’t reflected in its activities or that they are among the 25% of next generation members who want to found their own company.

Seeding Next Gen ventures

But what if we can combine these interests, wants and assets to create something that is more than the sum of its parts? What if we can engage the Next Gen’s interests, passion for the future and founding something of their own with the non-financial assets of the core family business to spark and nurture that entrepreneurialism? What if we can create a whole new training ground which creates value, and feeds, fuels and future-proofs the core family business, all at the same time?

A common approach to engage Next Gen members outside of the operating business is to set up a family office and carve out a role or portfolio for them to manage. This, of course, has its benefits: it’s an exciting way for Next Gen members to get involved, make a real impact and play to their interests through diversifying their family’s investments.

It is, however, at the very heart of it, purely a diversification exercise, leveraging financial assets and moving away from the entrepreneurial DNA which gave the family — and its business — their original edge. Relying only on the family office to engage the Next Gen risks shifting the nature of the family away from the very origin of its wealth creation: taking entrepreneurial risk and building value through business. So why turn entrepreneurial families solely into investing families? Why pivot away to play a whole new game when we can buckle down and break records in the one we were winning?

Do we want to think of the next generation as investors or executors? Do we want them to manage the wealth for the next generation, or create wealth for the next generation?

Wealth regeneration

There is another way: an innovative and proven, yet less common, approach is to instead leverage operating assets to engage Next Gen members and shift their activities toward creation. As opposed to delegating funds and making would-be founders financial asset managers, a family can delegate underutilised non-financial assets and empower family entrepreneurs. Through a well-devised family innovation plan, new combinations of assets such as distribution channels, R&D, licences, equipment and land can take on a whole new life when infused with Next Gen members’ interests and ideas, giving them an entrepreneurial advantage and the ability to make new waves within the family empire.

By engaging the Next Gen to get creative with the family’s assets, we provide the environment for added benefits which cannot be achieved by a family office alone:

• Creating affection for the origin of the family’s fortune, and hence what the family offers beyond financial gain. Next Gen entrepreneurs have the opportunity to strengthen family bonds through intergenerational exchanges in knowledge, and nurture an appreciation for what the family (and original founder) has created beyond financial wealth. With the older generation often believing they have imparted 70% of their knowledge while the younger generation feel it is closer to 10%, this is no small consideration.
• Contributing to wealth regeneration as opposed to wealth preservation. With the rule of thumb being that the family business needs to grow by 10% every two to three years to keep family wealth at a constant level as the generations expand, it would be folly to relegate Next Gen potential founders to managing financial assets when there are others they could be better adept at exploiting to their full.
• Leaving the next generation with the ability to build on what they will inherit, not just manage it. As the old saying goes, if you give a man a fish, he’ll eat for a day; if you teach a man to fish, he’ll build businesses for a lifetime.

For the less convinced, let us take the Mulliez family as an example. Had they stopped and rested on the laurels of their first-generation founder, their empire would be limited to a single business generating an annual revenue of $14.6m. Had that been the case, the Mulliez second and third generations would have missed out on founding companies that collectively generate in the region of $51b in revenue every year. It truly begs the question: “what could my family do? What could be down the line for us?”

We believe that family businesses have the responsibility and moral authority to build and create value through conducting business and creating value for their customers and the global economies they power. We see this ‘obstacle’ as more of a unique opportunity to exercise the Next Gen’s entrepreneurial muscle, strengthen familial ties and knowledge exchange, and prepare them for succession and the challenges of tomorrow.

Grooming the next generation of entrepreneurs

The realities of managing a large family business and succession planning, however, are complicated, with many parties and interests to consider and manage across multiple generations. Successfully doing so involves navigating a number of obstacles and allaying an assortment of risks, including:

• Establishing Next Gen entrepreneurial experience and credibility. Even though a Next Gen member may be ready and willing to take the plunge, that first jump in the deep end is still as daunting as it is for any first-time founder. In addition, using family assets for a new venture can come with hidden strings attached: there may be members who, though not stakeholders in the venture, have an interest in the venture’s outcome and are inclined to add pressure or become too involved. All of which can inhibit the founder’s learning curve and the success of the venture.
• Next Gen having become accustomed to the execution side of the table as opposed to the investment side. The two realms require very different skill sets. As an investor, one needs to make good decisions to maximise the risk-reward payoff. As an entrepreneur, meanwhile, the Next Gen member must do the work to affect that payoff. An investor estimates the probability of success; an entrepreneur works to influence it.
• Ably managing and optimising family dynamics. Getting the right level of support from family members whilst having the freedom and agency to create new, innovative combinations outside of the family tradition is a careful balancing act and essential to obtaining that unfair advantage. This is important as the farther the family member moves away from the core business or their family assets, the less of an advantage the venture could have vs. others in the wild.

Containing these risks are the reason why establishing a solid family innovation plan is a necessity. To significantly limit the downsides of Next Gen entrepreneurial ventures, it is critical to provide with:

• Guidance and safety rails to establish a safe, supportive environment to bolster the Next Gen’s confidence and accompany them in the initial stages of entrepreneurship, from ideating and validating a business to building a prototype and getting to the point of investability and external validation;
• Risk mitigation to limit the downsides of the venture and maximise the probability of success by putting Next Gen founders in a context which fosters innovation and their entrepreneurial skill set;
• Governance and good oversight to ensure alignment on boundaries between the Next Gen founder, their team and the family office and make for an investable venture. This includes limiting competing factors between businesses, accurately identifying synergies between family assets and motivated Next Gen members’ interests and expertly navigating family dynamics to activate them.

Choosing the right execution model

While a family office serves to isolate and make the most out of the family capital, venture builders serve to make the most out of all the rest. Engaging a seasoned venture builder like Wright Partners will additionally:

• Allow Next Gen to combine family know-how with the expertise of a team of exceptional business and product professionals to explore brand new markets and categories, preparing them to take on the challenges of the future;
• Limit the investment required, in comparison to a Next Gen entrepreneur choosing to go off on their own, and maximising the usage of capital;
• Curb the risk associated with building new ventures by leveraging existing assets and expertise within the networks of the family business are Wright Partners, drastically increasing the probability of a successful venture.

The creation of new ventures within the family fold but outside the family business has numerous benefits in addition to motivating and training Next Gen members, including enabling new and innovative offerings to be created completely unrestricted by the traditions, reputation or ‘old rules’ of the family business.

Regardless of whether the successful venture is chosen to be kept, sold or integrated by the family business, it has done its job; maximising the value and wealth creation of a family business by making the very best use of its diverse and numerous assets, and keeping the entrepreneurial spirit of the family alive to unite it and carry its business through the generations.

This is the first of two articles on Next Gen venture building. In the second, we’ll be going through the more practical elements, including the criteria for success and the ins and outs of governance.

If you have any thoughts or questions on the topic, please send them to contact@wright.partners so we can address them, and follow Wright Partners on LinkedIn and Medium to be the first to know when Part 2 hits the press.

Authors:

Ziv Ragowsky, Founding Partner at Wright Partners

Joachim Vandaele, Founding Partner at Wright Partners

Chelcie Poole, Venture Architect at Wright Partners

This article is written as part of EDB’s Corporate Venture Launchpad 2.0 — an expanded S$20m programme by EDB New Ventures, designed to enable companies to incubate and launch a new venture from Singapore, supported by venture studios experienced in corporate venture building.