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The Start-Up Families: How Old Family Businesses are Changing With Times

The Start-Up Families: How Old Family Businesses are Changing With Times

Start-ups are creating wealth the same way that business families used to, but old family businesses are also evolving with the times

K.V. Kamath is the Chairman, National Bank for Financing Infrastructure and Development K.V. Kamath is the Chairman, National Bank for Financing Infrastructure and Development

We need to look at modern family businesses from a different perspective than the old families. A fair bit of transformation and professionalism is happening there. But they are grappling with succession—in essence, how a family structure, or a family without a formal structure, runs a business moving forward. We are seeing this struggle in a number of business groups.

But the most interesting thing in terms of family businesses will be the new start-ups. All of these began as a single person starting a firm, or a husband-and-wife team, or a group of co-founders. They will now evolve.

How will this evolution progress? My answer to this is very simple. We have leapfrogged from the time when families created wealth. Yes, there are still families who have created and will continue to grow and create wealth. They have already created professional structures. Their next challenge is how to pass wealth on to the next generation. But it is the 60,000-70,000 digital start-ups that fascinate me the most. To me, they are the new business families. Most of them are bootstrapped and PE funded, and have created wealth. So, you see an ecosystem of start-up companies driving wealth.

Take the entire wealth that these new enterprises are capable of creating, even if you deflate the existing valuations following the global turmoil. That is going to be a sizeable part of the wealth of family businesses in the overall marketplace. So, we are in a very interesting phase, where the old family-owned businesses will grow and the family structures will get completely corporatised. The challenge for them will be to pass on the wealth. On the other hand, the new start-up entrepreneurs will come in with virtually no bars in their mind. They will go in and drive things.

Today, old family businesses have understood the challenges of succession and are addressing the issue considerably better than they were doing, say, 20 years ago. They are not afraid to sit and acknowledge that there is a challenge and address it. They are also not averse to getting advice from appropriate sources. A lot of this advice has come from thinkers overseas who have done this [in developed economies]. Globally, families have looked at this succession problem perhaps a hundred years ago. We are seeing it only now. So, there is a vast repository of theoretical knowledge with overseas universities and teachers at various levels.

In addition, listed family-owned companies face oversight from the institutions around them. The institutional set-up, including regulators and proxy advisory firms, brings discipline into the structures. Today, if you are a listed company, it is very difficult to hide. I believe effective family leaders who bring as good or better value than an outside professional will continue in business. Otherwise, families are happy to bring in professional management and settle for wealth distribution amongst themselves. I am also seeing some family members who don’t want to be in the business either exiting from active business management or the business entirely. So, I think that the shift has already started.

The separation of mindsets with regard to ownership and governance is required whether you are listed or unlisted. Let’s take the case of an unlisted company. They still have other stakeholders. So, you need to bring a particular approach to the table where you have got stakeholders. And if you are listed, you definitely have a stakeholder with a financial interest. Even if you’re not listed, this separation of mindset is required. People are starting to realise it.

I think most businesses are now risk-aware, whether family or otherwise. The only seeming exceptions, with a very high tolerance for risk, are the new start-ups. It’s like the young guy [start-up founder] doesn’t have anything to lose, and his company has third-party funding, and he has his drive and ambition and his sweat. The established family businesses, having created wealth through their entrepreneurial drive, are now in wealth protection mode and appear more risk-averse. The risk tolerance of a family business is much better articulated today than the risk tolerance of a start-up. Consequently, I can see start-ups coming in with a greater force with increased contribution to economic growth.

I see family businesses leveraging and growing their core businesses. The family businesses, through family offices, are also starting to invest in a lot of start-ups. It’s a very interesting development. But again, it’s very interesting to see what their risk tolerance is. One should see what proportion or composition of debt, equity, and private equity they have in their investment portfolio. They are still risk averse.

We have also seen the rise of daughters in the family businesses. It had to happen. I think there was an earlier mindset that the businesses were going to be run by male family members. That, in my opinion, has been totally destroyed. Whoever can lead better should be in charge of the company. Now there are sufficient examples to demonstrate that. It will happen in a bigger manner.

Not least among others, family companies are also aligning with ESG goals. They will be consistent with the environment. Nobody, in my opinion, can afford to disregard environmental regulations. They started out a little slowly, but they are catching up quickly. We will continue to see rapid evolution and economic contribution over the coming years.

 

K.V. Kamath is the Chairman, National Bank for Financing Infrastructure and Development. As told to Anand Adhikari. Views are personal