How Family Businesses and VC Backed Startups Face Similar Boardroom Challenges
Family businesses have a lot in common with venture capital (VC) backed companies. First, they are led by passionate, inspired individuals, their founders, who are determined to challenge the low odds of success for their new venture in order to realize their vision. They also both face major business challenges as they grow, and their early evolution can be characterized as operating from one crisis to the next — these are resource constrained companies in need of risk capital to grow.
For venture-backed companies, their future depends on whether the company can justify attracting the next round of preferred equity from insiders or from a new investor – with the latter being far preferable to the former. For family businesses, they rely on “friends and family” much like “angel” investors in early-stage VC, to reach self-sustaining operations. The greatest similarity between these types of companies, however, lies in the fact that they are governed by a small, insular group, the board of directors.
Most important, these boards, whether they are populated by professional investors or family members, are often dysfunctional.
Whether or not they are bound by blood relations, in both the family-owned company and the venture-backed company, the most influential directors feel they have an inalienable right to be at the table. This perceived right also has the effect of immunizing many of these directors from feeling that they owe accountability to their peers on the board. In venture-backed companies, this is facilitated by contractual board seat rights granted to a fund when it makes the investment. In family-owned companies, the right is conferred by blood, and by your place in the family hierarchy.
A Familiar Echo?
Family boards usually lack outside voices mandated by investors. Consequently, there is no check and balance on the patriarch. In contrast, in venture backed company boards, independent directors are actively recruited as a best practice. A single independent voice can often play a critical role as a fiduciary that does not carry inherent conflicts of interest.
Unfortunately, it is common practice for VCs to recruit independent directors who help build revenue, ignoring whether they also have skills as consensus builders. A closely held family board needs outside voices, just as the VC board does, that are able to challenge the leader.
For both of these types of closely held businesses, lack of accountability leads to bad board behavior and to violations of fiduciary duty.