These Values Help Family Businesses Survive and Thrive in Tough Times
Knowledge to be gained from those that don't face pressure from VC backers.
Despite spending eight years on the executive leadership team of a VC-funded internet company, and receiving offers to fund my own venture, I surprised many of my industry peers by opting for a family business model when I founded my company last year.
It was by no means an easy decision. Internet companies, of course, require a certain degree of scale to succeed, and scale requires investment. If you’re not taking money from investors, where is it coming from? I was fortunate enough to be able to rely on personal savings, but clearly not everybody can do that or wants to take on such risk.
Venture capital is, therefore, always likely to be the nature of the beast when it comes to internet companies, which is a shame given the massive influence of the sector today. As soon as VCs are involved, the decision-making dynamics in an organization change, as leadership teams are tasked with ensuring they provide a good return to the investors.
To VCs, start-ups are entities whose run rates they can accelerate over a short period before taking them to IPO or selling to a larger company that wants to bump its top line. As the businesses prioritize this goal over others, it’s their customers that often lose out.
I witnessed this first-hand in my own industry, design and antiques, whose shift to digital saw dealers grow frustrated when VC-backed online marketplaces moved to a transactional model, taking chunky commissions from their sales and regulating their communications with customers to prevent anybody from trying to move deals offline.
I know the only way we can maintain our promise to build a marketplace that works first and foremost for its buyers and sellers, and is profitable and sustainable for everybody in the long run, is to be a family business. Our priority will always be the happiness of those actually using the marketplace, not short-term hyper growth targets.
It is for these reasons, I believe, that studies consistently show family businesses are, on the whole, more successful. According to Credit Suisse, they outperform non-family-owned companies in every region and sector, with not just higher growth and profits but also better ESG scores and even greater resilience shown during the pandemic.
VC-backed companies may be structured and funded differently than family businesses, but that doesn’t mean they can’t adopt some of the common traits that enable them to excel.
Here are four areas where I think internet companies can learn from family businesses:
Family businesses, by their nature, are built for longevity. They’re not looking for a five-year exit, but rather to provide long-term value to their customers, and are therefore less likely to sacrifice longevity for short-term gains. Distracted by quarterly returns or earn-out targets, public or VC-backed companies can lack this long-lens orientation.
Members of a family business often act more like stewards, committed to handing it to the next generation in better condition than when they got it. Leaders of internet companies can benefit from this ethos, seeking to emulate the deeper, more meaningful connections that family businesses typically build with their customers, employees and suppliers, with the view that such engagement boosts the overall value of the company.
The pandemic is forcing companies to lean away from the profit-at-all-costs model that has long dominated the business world, as people increasingly expect to engage with organizations that understand good business is human, not corporate. Family businesses have known this for a long time, which is why their principal motivation is more commonly passion and making customers happy, rather than rapid sales growth.
Great family businesses are, of course, underpinned by family values, encompassing trust, familiarity, integrity and humility. This could explain why a study by Harvard Business Review found that retention at family-run businesses is better than at comparison companies. With huge competition for good talent in the technology sector, internet businesses that embrace family values are likely to attract and retain better people.
Patience, but moving fast when needed
The unique structure of a family business lends itself well to the kind of strategic patience that VC-backed or publicly-listed companies can oftentimes lack. Just because the chosen strategy doesn’t pay dividends in the short-run doesn’t mean it’s not right for the long-term success of the business.
Facing pressure from external shareholders, internet companies can be prone to discarding strategies that don’t work immediately, while family businesses are more likely to hold firm and reap the rewards at a later time. Meanwhile, however, with absolute control of the company and its decisions, family businesses can also be in a better position to act and pivot quickly when markets change.
The right balance between tradition and digital
As the founder of an online marketplace, I will always advocate the incredible power of technology to connect us on a global scale. But digitization can also have some negative consequences when it is overdone. The internet can bring down barriers, yet intermediary platforms often introduce new friction to support their sales model and growth targets.
Through their laser focus on client satisfaction, family businesses are willing to forego short-sighted growth opportunities to protect the long-term relationships with their customers. In the online world, that often means preserving traditional values that people still hold dear, rather than eliminating them all for the sake of digitization.
Entrepreneur Leadership Network Contributor