18 Jun What tech companies can learn from family businesses
Many technology start-ups think that their businesses are entirely unique. Yet, they face many of the same issues as any business. Indeed, many tech companies are family businesses. So, let’s take a look at a few things that tech companies might learn from companies outside their normal circles—namely, how to look beyond the financial needs of the company and focus on the human and intellectual capital of the business.
What is a “family business”?
Most people mistakenly think of family businesses as being only the sort of “mom-and-pop” storefronts, selling goods or services at retail. While those are, of course, family businesses, family businesses are found in a much wider spectrum of our economy. Consider these statistics:
- Approximately 90% of all businesses in North America are family-run.
- Family businesses pay over 60% of the country’s wages, and they create nearly 80% of all new jobs.
- Family businesses generate 50% of the nation’s GDP.
- Nearly 35% of the S&P 500 companies are family businesses.
Why might now be a great time to study family businesses?
The recent downturn in our world economy has brought new attention to family businesses. Some of this attention is due to the fact that family businesses seem to be able to weather economic storms a bit better than others (see, for example, http://www.huffingtonpost.com/rod-shrader/family-businesses-may-hav_b_190876.html). For example, consider our nation’s three automakers. While Chrysler and General Motors are in bankruptcy, Ford appears to be surviving well. This may be, in part, because of the Ford family’s effective control of the company: while the Ford family owns only 4% of the overall equity, they control 40% of the voting rights. Family control may not be the only reason behind the success, but it is worth looking at how family firms work to see how we might emulate their behavior.
What’s different about family firms?
Every business worries about financial capital. Indeed, no business can survive without sufficient capital to maintain operations. Emerging companies know this simple fact well, and family businesses are really no different in that regard. Family businesses, however, often have a much longer time horizon for their businesses. Instead of looking for an “exit” in five to seven years (or even sooner), family firms often are hoping to survive for generations. It may at first seem paradoxical for a startup to focus on lasting for decades, but imagine the potential benefits. If a company builds itself to last, it is likely that it will be much stronger and more valuable to a potential investor or purchaser. In other words, a startup that focuses beyond the exit may be in a stronger position if and when that exit presents itself because the company will be a more secure investment.
That said, a tech startup needs to remain true to itself and may need to grow much more quickly than a generational family business. So, how might a startup emulate a family firm, while remaining a rapidly expanding enterprise? One step is to focus beyond financial capital and pay more attention to the intellectual and human capital of the business. This type of intangible, patient capital is incredibly valuable, and may set the startup apart from its competitors.
What is intellectual and human capital?
The terms “intellectual capital” and “human capital,” pioneered by a preeminent family business expert, James Hughes, refer to the capital that a family has outside of its money. He believes that a family’s focus on these intangible forms of capital can help the family enterprise survive for generations. The human capital consists of the individuals who make up the family, and the intellectual capital is what each of those individuals knows. It is critical to understand that as the financial capital grows, the human and intellectual capital of the business ought to be nurtured and developed, too. To ensure that human capital is growing, a business must take care of the physical and emotional well-being of the individuals involved in the business. As for intellectual capital, a business must not only make sure that each individual’s own intellectual capital is growing, but that it can be shared and effectively used by the business. You can imagine how focusing on these aspects of a family could help the family, and its business, prosper.
A startup that focuses some attention on these patient forms of capital will excel, too. A business that takes care of its employees and its owners will thrive, compared to one that ignores its human capital at all costs. A startup does not necessarily need full health care coverage or exceptional benefits to do well here—simply doing what it can to keep its team members healthy will go a long way.
The intellectual capital is a bit easier to focus on in a tech startup; indeed, it often may be the only type of capital it has! However, this can be lost if it is not nurtured and shared effectively. A startup must make sure that it not rest on its intellectual laurels, and it must position itself to share the knowledge among the team members. For example, a startup can establish periodic meetings specifically designed to help the team members share their knowledge. Then, when the time comes, it must have necessary pieces in place to be able to act on the knowledge it has. A focused approach to this readiness will be critical to the company’s success.
Focus on Families
Family businesses, of course, do not hold all of the answers for startups of all sorts. Nevertheless, focusing some attention on a business’s human and intellectual capital, while at the same time driving to find that financial capital, can help any startup use some of the best aspects of the strongest family businesses.
The opinions expressed herein or statements made in the above column are solely those of the author, and do not necessarily reflect the views of Wisconsin Technology Network, LLC. WTN accepts no legal liability or responsibility for any claims made or opinions expressed herein.