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Family Businesses and Entrepreneurship Ecosystems

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All entrepreneurship ecosystems require a supply pipeline of people willing and able to create and exploit opportunities, take risks and look to grow businesses.  To that end we often (rightly) look at universities as the sources of such entrepreneurs when considering eco-systems, but another source also exists: family businesses.  Family businesses are differentiated from non-family businesses are defined as:

a business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families (Chua et al, 1999).

Family businesses are a vital component of economic systems around the world, accounting for two thirds of all businesses (Harvard Business School), between 70 and 90% of global GDP, between 50-80% of jobs (European Family Businesses, 2012), and perhaps most interestingly of all when considering the focus of this blog, 85% of start-up companies are established with family money – the financial return from family businesses which are redistributed amongst family members (Family Firm Institute, 2012).

Entrepreneurship is not just about starting new businesses, but about the creation, identification and exploitation of opportunity – family businesses can often help sustain such opportunity through their internal operations and external commitment to a community whilst encouraging further entrepreneurial endeavours both inside and outside of the firm.  With this kind of representation globally it is worth considering how family businesses might contribute to the creation, operation and sustenance of an entrepreneurial ecosystem.

Isenberg’s definition of an entrepreneurial ecosystem as being an environment where entrepreneurs have adequate access to human, financial and professional resources required and operate within a system that is supportive politically, policy-wise and legally (Isenberg, 2010) opens up opportunities to understand how family businesses can contribute.  With Isenberg’s conditions in mind, it appears that family businesses may satisfy each of the identified components within their own operations, offering up the opportunity to both recognize and scale up what are effectively their own mini-entrepreneurial ecosystems. Family businesses have a vested interest in providing the correct conditions for entrepreneurship if they are to remain within family control (succession). For a successor to take over successfully they must have internal political support of key decision-makers and stakeholders within the family and firm. Similarly, the family business must invest in the successor’s development over time and provide them with the necessary professional support. Succession thus requires each of Isenberg’s components to be in play at micro level within their own individual organisations.

Family businesses can also provide a critically important function for any fledgling business or entrepreneurial idea – ‘patient capital’. This is where investors take the long view on an investment (both financial and non-financial) in order to realize their returns. Family businesses make patient capital investments on a regular basis due to the typically long-term nature of their operations – family involvement and generational succession by its nature takes time.  Patient capital is therefore a critical component of successful succession in family business, but also in the day-to-day operations of a family business and the identification, training and socialisation of family members involved in the business, as well as identification and harnessing of non-family members’ ideas, entrepreneurial endeavor and networks for the continuation of the business. In family business scholarship this is called ‘stewardship’ and has been identified as one of the crucial traits of both successful family businesses and businesses of longevity (Miller and Le Breton-Miller, 2005). Learning from this approach would allow policymakers to implement stable, supportive policies for entrepreneurship ecosystems to flourish.

All of which is fine and easy to say, but without practical examples can come across as purely theoretical. Handily, there exists a useful example in what may seem to some an unlikely place – the north of Scotland in an area called Moray. In Moray there are four of Scotland’s oldest businesses – Johnstons of Elgin (a high end cashmere knitwear and mill company), Wm Grant & Sons (makers of the world’s most popular single malt whisky – Glenfiddich), Walkers Shortbread (bakers) and Baxters (soups and jams) – all of whom are family owned and have each been based in the area for more that a hundred years each.  Their commitment to an area that is far removed from markets, difficult to get to and from and lacking in clearly obvious natural resources for the companies at hand is demonstrated over the many years combined they have been located there, as well as their contribution to local supply side firms – principally farming related, but also the service sector companies that help support and sustain the larger scale companies noted as well as the communities more generally. The cluster of longstanding family owned businesses with multinational presence in a peripheral area is an example of how family businesses contribute to entrepreneurial ecosystems and healthy economies in even the most remote areas.

Here at the Hunter Centre we have a number of PhD students looking at the different facets of entrepreneurship including ecosystems and family business sponsorship of spin-out/of firms. Although the findings are yet to be finalized, initial research suggests that family businesses are adept at the sponsorship and development of new firms who become part of the larger ecosystem as both inputs to and actors within the system. Family businesses thus play both input and output roles in entrepreneurial ecosystems – on the input side they are often found in the background of entrepreneurs acting as mentors, supporters and providers of capital; on the output side they can be found often as the result of entrepreneurial endeavours which, with growth over time, involve other family members in their development and activities. Family businesses are rarely started out as such – they are typically single entrepreneurs looking to develop and grow a business who require help and thus turn to family members for support. In this sense, family businesses are often micro entrepreneurial ecosystems in their own right who go on to become an important function of the larger entrepreneurial ecosystem in a kind of virtuous circle.

References

Chua, J. H., Chrisman, J. J. and Sharma, P. (1999), “Defining the Family Business by Behavior”, Entrepreneurship Theory & Practice,, 23(4), pp. 19–39.

Family Firm Institute, http://www.ffi.org/?page=globaldatapoints

Isenberg.D. (2010). The Big Idea: How to Start an Entrepreneurial Revolution. Harvard Business Review, Vol.88 (6), pp 41-50, June 2010

Management of the Family Business: Harvard Business School Class Description, http://www.hbs.edu/coursecatalog/1655.html

Miller, D. & Le Breton-Miller, I. (2005). Managing for the Long Run: Lessons in Competitive Advantage from Great Family Businesses. Boston, MA: Harvard Business School Press.

1 Response

  1. Sarah Dodd

    A really insightful and engaging analysis of the role family firms play in entrepreneurial ecosystems, and the impact of those ecosystems on family firms.

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