Starting up a next generation start up?

Starting up a next generation start up?

You may be thinking about joining your family business but wondering if it is the right decision for you.  Perhaps the core business isn’t really a passion for you; perhaps it is already well served by other family members who are doing a good job of running the business.

Whatever the reason, there might be other ways to make your mark.

Family and business lifecycles

In the first few generations, family wealth tends to be tied to a single core business, for example manufacturing.  The first generation will have worked hard and may have made significant personal sacrifices in order to grow that business and taken risks early on.  No doubt they had entrepreneurial flair, ambition and drive in order to make the business a success.  As families go through a lifecycle, so do businesses and as that business grew and matured, it may have become less relevant in today’s society, or it may have plateaued in terms of its market share.  It may even be in decline.

Why would the family consider supporting a next generation start up?

As the core business moves through its lifecycle, it makes sense for the family to at least consider investing in other business ventures in order to grow the business.  These may be complimentary, such as through distribution of the manufactured products, or completely new.  The ideas for these new ventures may well come from members of the next generation.

Helping the next generation to pursue avenues that they have a passion for is a good way of making sure that the family attracts and retains the talent in the next generation and doesn’t lose that talent to the wider employment market.

Why would you as the next generation consider pursuing your business ideas under the umbrella of the family enterprise?

By pursuing your business idea under the umbrella of the existing family enterprise, you will be able to benefit from the following:

  • the family’s experience of running businesses.  For example, you may find you are able to tap into some invaluable mentoring support.
  • financial support.  Although be prepared for the fact that financial support is likely to be given in exchange for a significant chunk of equity in your business.
  • back office support.  Start up businesses can struggle to make ends meet and access to back office and other support services can really make a difference.
  • the family name.  The reputation and general awareness of the family name may help to give your fledgling business a kick start.  Of course, for various reasons, you may choose to start the business under a different name.

The Smith family

I worked with one family, let’s call them the Smiths, whose manufacturing business, Smiths Corporation, had been hugely successful, floating on the stock exchange and making a significant contribution to the wealth and employment in a significant proportion of their home country.  The father, Albert, is a member of the third and current generation.  He was struggling to come to terms with the fact that the business was in slow decline.  The market was saturated and there was no-one in the next generation willing and able to invest time and energy in that business.  However, both of his children were keen to run other business ventures:

  • his son Aaron had set up and was already running a successful business as an European distributor of the products manufactured by the core business;
  • his daughter, Barbara, was keen to set up and run a tech start-up in a totally separate industry.

Whilst Albert was keen to support his children, he was struggling to come to terms with the fact that neither of them was likely to take the core business forward.

Making your mark – how to go about it

Perhaps you have a desire to champion a new business venture on behalf of your family?

If this is something that appeals to you, you will need to give careful thought to how you present your idea to your family.  If you are part of a larger and more established business family, you may find that a process already exists for enterprising members of the next generation to present business ideas to the family council.  However, as was the case for Barbara and the Smith family, it may be that this is the first time your family has had to consider such a proposal.  Where this is the case, you may need to be patient, whilst the family weighs up the prospect of investing in new ventures and considers how to approach the new venture. 

Barbara will need to look at the following:

  • the nature of the business venture that she wishes to put forward.  Is it aligned with her passions and does it suit her skills?
  • once she has settled on a particular business idea, she will need to make sure that she researches it thoroughly.  

Some of the things that she will need to consider are:

  • is there a gap in the market for her idea?
  • is it scalable?
  • Is it likely to be profitable and how long will it take to generate a profit?
  • the preparation of a business plan.  She will need to be ready to present it to the various stakeholders in the business, including Albert and Aaron.  She should aim to highlight to her family any benefits the new venture will bring to it and/or the core business operated by the Smith Corporation;
  • she should prepare herself for the possibility that her idea might not be welcomed with open arms and she may need to be flexible.

In the case of the Smith family, Albert has long harboured a wish that one of his children would take over the reins for the core business and turn it around.  He had a strong emotional attachment to the business and it was a real challenge for him to accept that their ambitions and lifestyles meant that this was not going to happen as it meant accepting that the future of the core business was at best uncertain.  Albert’s internal struggles were undoubtedly impacting the pace of the process and (arguably) his enthusiasm for supporting Barbara’s business ideas.

Moving forward

Starting a new business venture is a huge challenge.  As the Smith family have shown us, doing so in the context of a family business can bring its own set of challenges that need to be addressed.  However, identifying and nurturing talent in the next generation is critical to the future of family businesses and when done well, the results can be significant and long lasting.  The trick is for the family to move with sufficient speed to ensure that they don’t miss the boat in terms of securing the next generation of family talent.