Unlike publicly listed and financial shareholder companies, family-owned companies are driven by factors beyond pure financial outcomes. With these companies, the need to innovate and adapt is not just a matter of corporate responsibility, it is a matter of survival of the company and often, the family. At August One, our focus starts and ends with helping individuals and families live up to their full potential. In this Point of View, Sameer Narula (Managing Partner, August One) discusses the historical importance of the family business as a key driver of social and economic growth in the world.
The most basic unit of the human community is the family. This is the source and focus of most spiritual, emotional, physical, mental and financial well being in human societies from the beginning. It is, therefore, understandable that the history of businesses and companies also starts with the objectives of their founding families.
As Europe started adopting a money-based economic system in the 11th and 12th centuries, the seeds of commerce and, eventually, companies were laid. Human effort and time were de-materialized (or Tokensized in today's parlance) and the concept of non-land based inheritance took form.
From craftsmen’s workshops, through trading guilds to companies created by royal decree - business went through an evolution from being centred around an individual to a family and then becoming a legal entity on its own.
Family-owned businesses have existed for reasons beyond purely financial ones. They therefore have the built-in resilience to outlast short term external shocks, however, it also leaves them susceptible to emotional and human factors.
With demographic shifts, tech innovation and the current world situation, there is a renewed interest from entrepreneurs in building resilient, compassionate businesses that exist for more than financial reasons. A new generation of entrepreneurs is taking over the legacies of existing companies and charting a new path towards a sustainable, authentic and profitable future.
Transformation of traditional family-owned companies in Europe
Small and Medium family-owned brands in Europe have historically led the market with unique products and services within both the consumable (non-durable) and non-consumable (durable) categories. Like the German Mittelstand companies (family-owned SMEs), many of these companies are enduringly profitable with stable revenues and loyal customers over many decades. Often coming from craftsmen’s workshops and royal patronage, these companies transformed their businesses in the post-WW2 period by accessing production automation, institutional capital, a growing middle class of young consumers and pan-European market access.
Over the past few decades, ageing founders, limited succession options, uncertain business environments and changing customer needs have created continuity issues for these businesses. The current global economic shock has accelerated this situation.
In a rapidly changing business environment, these businesses have been unable to take full advantage of transformative digital technologies [1], access to cheap capital, opportunities in new markets (notably Asia), and new skill sets needed to compete with competition around the world. This has become even more evident with the drastic move to digital technologies the pandemic has accelerated over the past six months.
Many of these companies are enduringly profitable, have great products/services, but are in very traditional industries in second-tier cities (not attractive to the next generation of tech-oriented talent). Furthermore, their technologies, systems and processes don’t adequately reflect environmentally sustainable practices, and digital supply chains which are vital to long term success.
Additionally, a change in end consumer and corporate governance priorities is increasing the need for SMEs to adopt more sustainable practices in their businesses. General trends, including focus on plant-based foods, low carbon emission technologies, renewable materials etc will continue to have an impact on how SMEs think of their businesses.
Massive investments in technologies have created many new tools and systems that could potentially help transform these companies for the future and make them sustainable in every way. These tools can reduce costs, increase margins, provide access to new markets and attract a new generation of talent to reinvigorate their businesses while making a positive impact on the planet. Especially given the current global scenario, adopting new digital technologies will become a matter of survival for many companies.
The European Union seems to recognize this and through programs like the Green Action Plan (GAP), the European Union aims to help SMEs take advantage of the opportunities offered by the transition to a green economy. It offers various financial incentives and market support to companies that incorporate sustainability measures into their businesses [2]. In total, over €3.5B of investment in SMEs is likely to be unlocked via various EIF and EC initiatives including the Competitiveness Of SMEs (‘COSME’).
This creates a unique opportunity for European family-owned SMEs to live up to their potential by utilizing emerging tools, processes and technologies, while unlocking value for their investors and communities.
This is the first instalment of our three-part series on family businesses and the opportunity to unlock their potential. Next week, we will be discussing the opportunity for investors to participate in the great potential for growth that small and medium family-owned businesses offer.
[1] PwC Global Family Business Survey (2018)
[2] European Commission, Entrepreneurship and SMEs. SMEunited (2019)
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