Every Family Business Was Once a Startup

It all starts with the founders’ vision. When you combine it with entrepreneurship and hard work, a company emerges. In this sense, every family business was once a startup. A startup that has proven itself thanks to having the right business idea, a long-term approach, sustainable management, healthy growth and ongoing relevance in the market. With the objective of building a company not just for their own lifetime but rather for “eternity,” family businesses in their essence act responsibly not only when it comes to family, but also to future generations.

These days, graduates, career starters, young professionals and executives are pursuing “purpose-driven” jobs. What is now covered by the term “purpose-driven,” however, was already the main motivation for founding many family businesses from the start. As a “purpose movement,” some representatives of Generation Y see themselves above all as a counter-movement to capital-driven society. Purpose-driven entrepreneurs are rethinking business. Their companies are meant to serve employees and society, not the capital market. Of course, every healthy company also inherently intends to make a profit, which is even essential as the basis for a long-term entrepreneurial strategy. But it’s not the main reason for starting a company. Purpose instead of profit, that’s the motto, or: problem solving instead of profit, as an established family entrepreneur might put it.

Over the last 15 years in Germany, there has fortunately been an increased trend towards entrepreneurship,  a development that is shaped by the university environment. But that wasn’t always the case: you might recall the disastrous crash of the new market twenty years ago. The high availability of venture capital and subsequent establishment of a market for investment in startups established a culture at that time that fueled the “trading” of the few good startups at very high prices in relation to the available capital. As a result, startups were also driven by venture capital and were at least partially motivated by the prospect of selling at an opportune time in order to achieve an excessive valuation in relation to the value of the company. This behavior is not to be blamed on the people involved. The result was a “bubble” that led to the uncontrolled collapse of the venture capital market for funding talented entrepreneurs.

One thing is certain: “what” you perceive your company to be makes a significant difference. Is it an object of speculation that, like a rare bottle of wine or a coveted work of art, can achieve exorbitant sums of money on the market, or is it a personal investment in the future of society? This is where successful family entrepreneurs take a clear position. Like startups, they also had to first establish themselves in their early years, but had to do so mainly with the strength of their own resources. They built “stone on stone.” Organic growth, based on reinvestment, was the path to stability.

The family businesses of the future

In the push and pull between capital-driven startup culture on the one hand, and well-considered, sustainable management in accordance with the classic entrepreneurial principles on the other, it becomes clear how much companies, which also successfully serve as objects of speculation, can undermine the traditional laws of the market. Looking at the history of Facebook provides perhaps the most prominent example: In October 2007, NBC News reported that Microsoft had acquired a 1.6 percent share for 240 million dollars. As a result, Facebook’s speculative valuation soared to the unbelievable amount of 15 billion dollars. And Microsoft was not alone. As the Financial Times Deutschland reported in 2012, Facebook generated 16 billion dollars when it went public on NASDAQ, and was valued as a company at a total of 100 billion dollars. This was not only the largest IPO for an internet company at that point, but also happened at a time when Zuckerberg’s 32 million dollar platform had yet to make any noteworthy profit.

Because companies with underlying value are commonly valued using the formula – EBIT(DA) x multiple – i.e. earnings before interest, taxes, depreciation and amortization multiplied by a fixed multiple, which depends on the industry, size and the market environment, you would come to a multiple in this case of “around 3,000,” and end up with a calculation that may not be compatible with sustainable entrepreneurial principles of value. What could be discussed at this point is which paths investors might take to promote the founding of sustainable businesses. What environment needs to be established to create “the family businesses of the future”?

What opportunities are emerging?

One opportunity is to sell startups to family businesses. Rouven Dresselhaus, founder of the venture capital firm Cavalry Ventures and descendant of the Herford-based family business Dresselhaus, knows both worlds very well. In an article from 2018 in Handelsblatt, he took the following position:

“In Germany, 0.03 percent of the gross domestic product is invested in venture capital, in the US, it’s around 0.35 percent and in China around 0.24 percent. We have to get rid of our reluctance to invest equity capital as quickly as possible” (…) “If Germany wants to continue to play a leading role in the future, it needs local capital.”

The second major opportunity lies in family businesses functioning as startup forges. As incubators, corporate divisions found and build startups to advance the development of new digital products and services. By doing so, they link infrastructure, knowledge and established networks. The “brightest and most competent minds” of the company are placed in these new areas, which gives them the opportunity to work in a high-techenvironment that is distinguished by a sustainable approach that is also agile and innovative.

An example is the company Voith, which has been manufacturing turbines as its core business since the 70s. With the founding of Voith Digital Solutions in 2016, the corporation set the course for its digital agenda and pursued three main goals: First, the digital enrichment of its existing product portfolio with digital competencies that offer customers additional features. An example was the development of “Hyguard” monitoring (now “Oncare Acoustic”) in the form of sensors, which, much like experienced employees of the company, are able to hear how long the turbines will last just by listening to them and can pass on this information at the right time before the devices fail. Second, the development of new digital solutions in the traditional core markets. The introduction of “Myvoith” as an online platform for digital applications could be cited as an example. The third goal was the development of new products and business models for markets not yet covered by Voith, such as the founding of the joint startup “Merqbiz” with the Boston Consulting Group, a separate online platform for the waste paper trade.

Gastbeitrag von Stefan KlemmKlemm founded the high-potential network “QX Quarterly Crossing” with a partner in 2002, and two years later the “Entrepreneurs Club” as a network of entrepreneurs who are planning or have already completed succession. Since 2006, Klemm has been running the event series “Karrieretag Familienunternehmen” (Family Business Career Day), and since 2012, the employer branding and job portal “Karriere im Familienunternehmen.” (Careers in Family Businesses). Stefan Klemm publishes articles and gives lectures that focus on “SME succession” and “family businesses as employers.”

Klemm founded the high-potential network “QX Quarterly Crossing” with a partner in 2002, and two years later the “Entrepreneurs Club” as a network of entrepreneurs who are planning or have already completed succession. Since 2006, Klemm has been running the event series “Karrieretag Familienunternehmen” (Family Business Career Day), and since 2012, the employer branding and job portal “Karriere im Familienunternehmen.” (Careers in Family Businesses). Stefan Klemm publishes articles and gives lectures that focus on “SME succession” and “family businesses as employers.”

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