Family matters

Entrepreneur, Dec, 2002 by Jennifer Pellet

Family-owned businesses are often said to be the backbone of the American economy. So why is it so hard for them to find venture capital? "There's an enormous bias and prejudice among the venture community against family-owned businesses," explains Mark Greenough, president of San Mateo, California-based Greenough Consulting Group. "VCs tend to want control over who will be on the management team, and that's more difficult when there are relationship ties in addition to business interests."

Anticipation of an exit strategy conflict is another concern, adds Stephen Sammut, a venture partner at San Francisco-based private merchant bank Burrill & Co. "It's generally assumed that the family is not seeking to exit the deal the way a VC would and that even if the firm were to go public, it would remain a tightly controlled corporation with the family owning the majority of shares. So there's a dissonance between the VC model and the family ownership model."

To placate potential investors, Sammut suggests that family business owners offer written reassurance of the principals' commitment to the goals and exit strategy--or look elsewhere for a capital infusion. "Concessions may have to be made, with management agreeing to surrender control or decision-making authority regarding relatives who are employees," he says. "While venture capital is worth exploring, family businesses may find their efforts more productive with other sources of capital, such as angel investors and bank loans."