The opportunities and challenges of establishing a family venture fund
Many business-owning and wealthy families are keen to foster an entrepreneurial spirit in the next generation. For a first-generation entrepreneur, their passion, skills and attributes are perhaps the most valuable qualities they can pass on. The younger generations often absorb these entrepreneurial traits through observation or family conversations around the dinner table as they grow up. In many families, they are now consciously talking about transferring these values.
Cohen and Sharma describe the most successful enterprising families as those in which each generation adds a layer of entrepreneurial contributions to the work of previous generations in order to transition their businesses and develop their families simultaneously1. This idea does not imply that everyone in the younger generation should start up new businesses. Indeed, it may not be relevant. For example, where a family has an operating business, this can translate into opening new markets or bringing in new ways of doing business. In wealthy families, it can mean having the skill and ability to invest in other businesses or entrepreneurs. In both cases, it can mean an entrepreneurial style of leadership.
Why set up a family venture fund?
Many families choose to establish family venture funds as part of their planning for generational transition. This can be seen in families transitioning from the first to second generation where the influence of the wealth-creating entrepreneur is dominant, all the way to the fifth-generation families in business who wish to provide entrepreneurial opportunities for future generations.
Some business-owning families, whether they are located in Asia or Latin America, insist that their main business is managed by professionals. Meanwhile, family members are encouraged to start up new businesses that can be added to the family portfolio over time. This approach can be very motivating for younger generations and offers them a means for self-expression, as well as a way to promote their self-esteem. Starting a new venture can provide a valuable learning curve – whether it is successful or not.
Family venture funds in practice
A family venture fund sounds like an attractive proposition. To make it work successfully – for the family and the entrepreneur – it’s important to pay close attention to the details. The fund needs to appeal to family members as well as be fair and not a potential source of family conflict. Families should ensure they do not send any subliminal message to children that a parent may favour those that choose to be entrepreneurs. A fair process is vital for making funding decisions, and the family needs to agree or at least be clear about what happens if a venture is a success or failure.
At the outset, it is helpful if the following types of questions are considered, discussed and addressed to avoid misunderstandings:
There are a number of different ways in which families have structured their venture funds. Here we explore three examples:
The family established a venture fund to:
The family created a venture fund to give younger generations the opportunity to be wealth creators in their own right.
The family created a venture fund to:
Finding the right approach
As these case studies demonstrate, there are many different ways to create and run family venture funds. It’s vital to have clear objectives and key principles that everyone understands and agrees with. While family venture funds can present many exciting opportunities, it’s also important to consider any unintended consequences that could occur.
1 Cohen and Sharma, Entrepreneurs in every generation: How successful family businesses develop their next generation (2016)
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