Viewpoint: Here’s a great way for family businesses to meet the challenge of digitalisation: corporate venturing

One of the biggest challenges for family businesses is adapting to the digital world. But one way they are meeting this challenge is through corporate venturing, which not only helps with innovation, but also succession.

Corporate venturing is venture capital and private equity done by a company – there is no third party firm involved. Businesses can set up a corporate venturing group to back a number of businesses they either start from scratch, or buy into. On a smaller scale, the setting up a single business, either linked or not linked to the core business is also corporate venturing.

In an earlier Viewpoint, I talked about the threat digitalisation posed to family businesses, not least because they are legacy businesses often vulnerable to disruptive forces in the global business world. To meet the digital challenge, many family owners and managers of businesses are embracing corporate venturing.

And corporate venturing isn’t just being done by the big businesses, many smaller family businesses are also pursuing corporate venturing. That’s because corporate venturing can be an extremely useful way for family businesses, no matter what their size, to mitigate risk when it comes to innovation and the involvement of the next generation. For family businesses, corporate venturing makes sense in two big ways.

Firstly, by allowing companies to try out their relationship to digitalisation by separating the core business from the new venture. Effectively, businesses are able to try out activities in the digital sector and if they work they can incorporate them into the core business. But if it doesn’t work then the reputation of the core business isn’t harmed, or at least, mitigated. In effect, corporate venturing has very little downside when it comes to the reputation of a business, but plenty of upside for the core business – and the venture itself – if it works.

Here are some examples of how family businesses are meeting the digitalisation challenge through corporate venturing. The huge family-owned wholesale construction materials business called the Würth Group, recently pursued a corporate venturing initiative through a startup called Wucato, a business-to-business online portal. An example of corporate venturing by a smaller family business is what Leuchtturm Albenverlag – a German family business founded in 1971 that sells stamps and coins to collectors – did. The three sons of the founder decided to launch a startup called Torquato that is focused on selling high-quality consumer goods via the internet. The family company funded the startup, which has been very successful. Torquato now contributes roughly a third of total revenues for the family business.

Secondly, corporate venturing allows family businesses to train and assess the next generation of owner/managers. As a result, an increasing number of family businesses are using corporate venturing as a means of engagement with the next generation. They are saying to the next generation: ‘we will support you in your efforts to build a business and if it works out well then the next steps will be a role in the core family business’.

Not only is this strategy popular with the current owner/manager generation, but it is also popular with the next generation. The younger generation is more likely to want to work for a startup, then taking over an old, established business. For the next generation, startups are cool, established legacy businesses, are much less cool.

Here are some good examples of the next generation benefiting from corporate venturing. Benjamin Otto, a next generation member of the Otto family who controls the Otto Group, a German trading and services group, was involved in various startups for a decade before he decided to join the board of his family’s company. And Christina Suriadjaja, a next generation member of an Indonesian family company called PT Surya Semesta, set up a travel group called Travelio.com with backing from her family’s core business.

So, corporate venturing is perhaps the best way family businesses can innovate and help deal with the next generation. Not only that, corporate venturing can be done with very little reputational damage to the core business. No wonder more and more family businesses are embracing corporate venturing – it makes sense on many fronts.

Professor Nadine Kammerlander is chair of family business and academic director of the Institute of Family Business at WHU – Otto Beisheim School of Management