Family Businesses Need Entrepreneurs For Long-Run Success

By John A. Davis

Originally published in: Forbes (August 2014)

In the world of family business, the entrepreneurs we celebrate are usually founders of companies. These clever, hardworking individuals identify a good business opportunity, scrape together some money and loyal employees, and start a company that takes off. The heirs of the founder and later generations of the family are supposed to take care of and grow the founder’s creation; they are not expected to be entrepreneurs themselves. Even attempting to reinvent the family company can be seen as disloyal by the family.

This constraint often kills the family business.

We think it is time to reassess the importance of entrepreneurs for not only the continuation of the family company, but for the continued success of the family itself.

Managers inside your core business who think like entrepreneurs (we call them intrapreneurs) can identify opportunities that move your family company into new lines of business, rejuvenate the founder’s legacy, and put the enterprise on a new growth path. Entrepreneurs (typically family members) working outside the business but with family financial support can keep talented kin inside a broader “family enterprise,” diversify business activities, and build assets.

Families that want to stay in business for another generation don’t have a choice except to encourage entrepreneurship in and out of their company. There are business reasons and family reasons why we think this is true.

The Business Reasons

In today’s competitive environment of rapid technological change and quickly evolving industries, it doesn’t pay to become too attached to current lines of business or methods for serving customer needs. You need to regularly change what you make and sell, and probably how you make and sell it. You must be nimble and, as certain lines of business wane, be able to identify growth opportunities in and out of the core industry and pursue them in experimental, cost-effective ways. For that, you need the risk-taking, resourceful attitude of an entrepreneur.

Entrepreneurs are good at identifying commercial opportunities and getting new products and services off the ground, even when they don’t control the people and resources needed to do it. They know how to attract talent to help them when their idea is unproven, borrow resources they can’t afford to buy, and build buyers’ interest in their activity. Others may see them as risk takers, but good entrepreneurs are actually good at getting other folks to take risks. You need some people like this in your family company and in your family.

The Family Reasons

We’ve spent a lot of time studying why some families stay financially successful over generations and others don’t. (Actually, most don’t.) There are three reasons why families succeed.

First, successful families see important changes in their industry and adapt by diversifying into new activities that can grow. Simply put, successful families are entrepreneurial.

Second, families succeed because they invest in productive activities (including the development of the next generation), emphasize growing assets, and consume relatively little of their wealth. These families maintain a culture that encourages family members to create things of lasting value. It’s not surprising that these families encourage entrepreneurs.

Third, successful families remain reasonably united, keeping supportive members loyal to one another and to the family’s mission. Over generations, as families become more diverse, it is likely that only a few relatives per generation will directly work in the business. Outside-the-business members might still support family philanthropic efforts or social activities, and sometimes that level of involvement is enough to maintain family unity. But investing in family entrepreneurs can also keep talented members contributing to the broader family’s wealth and mission. (The new Millennial generation—ages 15 to 30—seems especially interested in being entrepreneurs.)

Investing in family entrepreneurs has to be done objectively based on the feasibility of their business plans, and also fairly within the family. Even if some entrepreneurial projects don’t succeed, these investments will help you spot talent to keep your business growing. And you are sending an important message: this family is committed to creating value.

About the authors:  Michael Roberts is recently retired after 25 years on the Harvard Business School faculty where he served in the Entrepreneurship unit and was executive director of the Arthur Rock Center for Entrepreneurship. He also served as executive director of the School’s case development efforts and continues to develop case studies for HBS. John Davis is a senior lecturer at Harvard Business School where he teaches and researches in the family business, family wealth, and life planning fields.  This op-ed first appeared on the HBS Working Knowledge website.