Do you own a family business and are looking at ways to innovate? Then maybe you should consider setting up a corporate venturing initiative. Here’s some thoughts on why corporate venturing makes a lot of sense for family businesses.
Corporate venturing is a growing phenomenon in the corporate world and increasingly becoming popular among family businesses, particularly in the US. Effectively, corporate venturing is venture capital and private equity done by a corporation - there is no third party investment firm involved. Typically, companies will set up another company, or an internal subsidiary, to be its corporate venturing arm.
The appeal of corporate venturing is that it cuts out the middleman, allowing greater control of investments, and potentially greater returns because there are no fees to pay a third party. But for family businesses, its appeal is potential even greater. In fact, corporate venturing can reinvigorate a family business and keep it going longer. When a family business is in a mature market and revenue growth is slowing down in that market, corporate venturing could be used to generate another, faster revenue stream.
This revenue stream might come in very handy for the family business by bolstering the core business and providing extra dividends for family shareholders. Corporate venturing can also be a useful way of engaging the next generation into the family business. Few things in the business world are sexier than venture capital. And the next generation is more likely to be engaged by venture capital investing, rather than a job in the parent company.
Here’s some family businesses that have set up corporate venture groups
Enterprise Holdings, which oversees the huge car rental business and is owned by the Taylor family, spun out a group called Centric in the late 1990s. It owns a highly successful prison services company called Keefe Group. Centric was sold last year and is now called TKC Holdings.
Johnson & Johnson, the pharmaceutical and consumer products group still owned by the Johnson family, set up Johnson & Johnson Development in 1973. The group has offices all around the world and concentrates on emerging health care businesses.
Barry-Wehmiller Companies, a specialist machining company controlled by the Chapman family, set up Forsyth Capital to focus on “ investing in and partnering with lower middle-market businesses through our ‘hybrid’ equity investment approach.”
Kuehne + Nagel, the Swiss logistics company owned by the Kuehne family, have set up a corporate venturing group that has recently backed LogIndex. (See separate article).
Often the families backing these corporate venturing initiatives are prepared to hold onto their investments for a very long term. They follow the logic of their family business and apply a long-term approach to building value in businesses. As a result, such initiatives are extremely appealing to companies looking for venture/private equity backing.
And that follows through on how these types of family-backed corporate venturing groups are staffed. Most often they employ corporate development specialists, rather than private equity people. Corporate development types have a better strategic fit with family business owners. The corporate development people thinks long term and how new acquisitions are strategically relevant. They also will accept more traditional and better-aligned compensation arrangements - family businesses like this arrangement.
Of course, corporate venturing requires a company to be a certain size before a family business can think about setting one up. But, as a way of invigorating businesses and achieving family wealth management objectives, corporate, venturing makes a lot of sense. It will no doubt be a growing area for family businesses in the future.
Spencer Burke is an adjunct lecturer in family business at Washington University in St. Louis, USA; and executive vice president, The St. Louis Trust Company