What can Indian family businesses learn from new-age start-ups?

The past few years has seen the dramatic rise in businesses start-ups, founded by young first-generation entrepreneurs from non-business backgrounds. These founders have bet their career and skin, so to speak: albeit aided by increased access to equity capital -- on an innovative idea, and the rapid growth of India’s digital audiences have played a key role. Unicorns, notwithstanding, the other start-ups, most of them using the power of digital, have probably raised more capital in the past decade than what the conventional Licence-Raj owners did in the previous 2 decades (post-liberalisation).

This jump-shift has justifiably prompted much soul-searching in many of India’s traditional family-owned-managed-businesses, who have had a generation or two of presence in the Indian market. The younger generation within these family businesses, many with B-school education from the global best business schools, are questioning their low-risk, snail’s pace of growth and contrasted with news of the exponential growing start-ups are beginning to feel that they are missing a trick.

India has historically had a glorious business track, along with enterprise-building as well as trading strength. Much of the business-ownership has always resided with families, and that trend still continues. We can map three phases of business transformation in India:

Pre-1991: when it was Licence-Raj, and businesses and owners had built capabilities and networks around this rule. Even though family firms in India are significant contributors to the country’s growth, they have faced serious competition since the liberalisation of the Indian economy in 1991, from the global giants. Thus, the Indian family businesses faced a new environment and the family businesses that were proactive and flexible in their approach were able to survive and flourish in the new business environment in India, whereas others were not able to withstand the pressure of the newly created freedom and failed to become leaders in their field.

1991-2015: Companies culturally adept at change-management could transition themselves to a consumer-economy and grew their businesses. Much of Licence-Raj businesses folded shop. New-age companies flourished.

Digital era circa post 2015: With the advent of digital transformation of consumption, younger Indian demographics, and the context of JAM trinity and demonetisation as major milestones, much of traditional businesses who did not change with the times, stagnated or perished. The new age digital companies (e-commerce-led) came into being and their valuations have overshot the traditional businesses due to future potential and perception of investors about the sustenance of those businesses. It is now a desire-or-do moment for traditional businesses, which are on threshold of higher scale or consumer velocity; but that change management journey has to begin quickly and arduously followed-through to avoid sinking of the enterprises.

Family businesses - Key transformational changes

The pace of business change in the 4th IR-led 21st Century is so fast that traditional businesses have not kept in sync with it; not just from “doing business” point of view, but also from ever-changing consumer-wants in the past two decades. The Old school businesses still think “hierarchy-led = aged personnel for larger roles & loyalty = competency”. This school of thought needs disruption of mindset and to onboard relevant talent for the right roles. Else the businesses would simply not survive this or another generation.

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The digital-divide currently also demonstrates demographic divide (segments) : in the form of the digital natives vs non-digital-natives ! That segmentation has to be factored into business models. The new age business ideas use this well. In the family business, there is dire need to bluntly re-examine their business model. Questions arise like: “Is it digital first?”;  “Does it speak to the new economy?”; “Is it leveraging the changing digital landscape?”; “Is it addressing the issues relevant to today’s customers?”; “How family businesses can tap funding from external sources - the fear and hesitancy of doing this ?”; “How this puts their business proposition in front of new age investors - VC’s / Angel Networks?”.

In most of the family run businesses, there is reluctance on the part of the family to yield power and delegate responsibilities.  The default option for in most family-owned companies is that the promoter’s kin typically children, would assume the management of the company.  This is not necessarily a bad thing, especially if the next generation are sufficiently qualified and adequately groomed before they take on the leadership mantle.

Family businesses also need to sharply address concerns about weak governance, ranging from issues like related party transactions, and actively instituting diversity initiatives and whistle-blower policies. In addition, the governance style has to reflect current modern capital market’s needs. Meeting and exceeding those standards and communicating them well gets to “premium” valuation stage! Else trying to use ‘legacy’ as a calling-card won’t evoke any response.

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Many research studies continue showing that in a family business, the family firm’s ability to take long-term bets are higher than that of institutionally held firms. Much of its ability to grow the business or pivot the business-lines to be relevant, rests with their ability to bring in non-family C-suites as well as independent directors on its boards. The ability of business owners to separate their role of being chief executive from the stewardship role that they are expected to play as “promoter-shareholder” is crucial.

As per Piramal (1996) and Bhattacharyya (2007), family-owned businesses in India have the following features which distinguish them from other family businesses worldwide:

•    Family relationships play very high importance in determining the position a person holds in the business.
•    The predominance of few castes which are the connotation for family-owned businesses in India (Aggarwals, Guptas, Chettiars, Jains, Parsees and Marwaris).
•    All members in the business follow a presiding culture pursued by the caste to which they belong.
•    Family, relatives and extended family have a strong feeling of trust and sincerity to the family that naturally construe as trust and sincerity to the business.
•    Higher positions are more likely to be held by sons and male relatives and in succession, as compared to the female relatives.

The other challenge is attracting top-quality talent. Most family run businesses are not seen as the primary choice for professionals because of perceived growth limitations and lack of transparency or at times, even basic ambition to grow the business. Having said that, family businesses do have their own learnings and inhibitions around start-ups.

What do family businesses like/admire about the new start-ups:

•    Access to low risk non-debt capital
•    The ability to scale up rapidly and spend ahead of the curve
•    Exponential growth prospects and soaring valuations – wealth multipliers

Why do family businesses dislike about the new start-ups:

•    Loss of control
•    Rapid pivots of business models and strategy. Remember continuity and being steady is the hallmark of most family businesses
•    Capital infusion ahead of the curve

 

The today’s 2nd Gen or the 3rd Gen family members are mostly well-educated and also have the advantage of having heard business conversations at home, right from their early years. But they might have differing ideas from their previous generation. Here is where working with external advisors and mentors helps in steering the difficult conversations and different generational lingos towards a win-win outcomes. Make the family enterprise agile and consumer-centric like a start-up, but backed with decades of learnings from successes, and importantly failures. That’s the reboot family firms need.

 

Views are personal. Sridharan is a corporate advisor and transformation coach; Mathias is a business strategist and early-stage investor.