Why VCs Steer Clear Of Family-Run Startups
Remember the hit flick Band Baaja Baaraat? The 2010 film, which made Ranveer Singh an overnight sensation, is about two friends who start a wedding planning business but the girl (as it happens in Yash Raj Films) falls in love with the boy, who has been led to believe that business and love should not mix, doesn’t reciprocate. This leads to both of them separating and starting competing business. They crash and burn only to realise that they have complementary skills and should come back together. The film ends with the lead pair getting married.
With a husband and wife team, any rupture in the team is magnified, disagreements more emotional/less rational, and compromises harder to arrive at.
However, such scenarios in the real world play out rather differently. The point being that love, marriage and inter-personal relationships among founders of start-ups aren’t palatable to potential backers. The recent cases of ShopClues and Mu Sigma have once again brought this debate to the fore.
Most VCs and serious angel investors don’t invest in family teams, be they husband and wife or siblings. Here are some reasons why.
Here are the reasons why VCs don’t invest in family teams:
1. The additional risk is not worth it
Investing in unproven entrepreneurs and their business ideas involves a great deal of risk. That is the very nature of being a VC. To be successful, a venture investor must balance that risk. That involves making choices and trade-offs on which risks are acceptable and which are not.
What differentiates family-run start-ups to a venture investor is that they introduce additional risks that are unique in nature.
In any start-up, one of the risks that a VC always considers is the possibility that the founding team may not survive intact during the journey of the startup. With a husband and wife team, any rupture in the team is magnified, disagreements more emotional/less rational, and compromises harder to arrive at. This typically has severe ramifications for the business, and any investor who has lived through it is understandably wary of adding yet another risk factor to those that are typical of all startups.
Also, it is harder to build a “team of peers” when two co-founders are either siblings or husband-wife duo.
2. Personal equations affecting professional ones
A personal disruption between founders—such as a family feud or divorce—can cripple the business management to a point beyond repair. Ask any investor anywhere in the world who has been through this phase in any of their investee companies, and they will tell you that the stress they undertake is as much as the divorcing couple!
There’s a common perception that career progression in a family-run startup is likely to be on the basis of blood rather than merit.
Scenarios where one co-founder plans the removal of another are just as dramatic. The emotional fallout of such situations (sons firing the father or warring brothers) can bring the growth of the company to a standstill.
3. Challenges in attracting talent
For a startup in a growth phase, with aspirations to scale up quickly, attracting the right talent is essential. But top quality talent are more likely to join startups which are run by professionals who could be friends or former classmates as opposed to founders tied by blood or love. The reason is the common perception that career progression in a family-run startup is likely to be on the basis of blood rather than merit.
4. Lack of clearly defined roles
This, perhaps, is of the most important factors keeping investors from investing in family-run startups. The lack of conversation around defining clear business roles for the co-founders poses a challenge in driving the business towards success. Add a variable to this equation—who will be the boss at work and at home? If the wife is the boss at work and the husband at home, or vice versa, the lines will start to blur at some point even in the office. What’s more, it will be on display for everyone to see and interpret in their own way. Thus, startups should make a note of this and even before they get ready to walk into a VC’s office, make sure they have a clearly defined role for every founder in the team. The importance of this can’t be asserted enough if you want to attract marquee investors in your business.