The Family Run Tech Business

If you live in the world of venture-funded companies, you may not have seen many software or hardware businesses that fit the traditional definition of a “Family Business.” But the vast majority of tech companies out there aren’t funded by institutional capital. Most are started the good old-fashioned way: self-funded, with an idea and just a few people to fill a need in a niche market.

With luck (and a lot of sweat equity), these ” lifestyle” companies grow into stable small businesses—and sometimes very substantial companies.

Among these lifestyle companies, a significant segment can be categorized as a family business.

This is not necessarily a good thing or a bad thing. It depends strictly on the details of the individual situation. There are world-class software and hardware companies controlled and run closely by families. On the other end of the spectrum are some of the worst-run, dysfunctional tech companies you can imagine. I’ve seen them personally, and they fit the very caricature of the nightmare family business.

A cautionary family business tale

A few years back, I briefly worked with a family-run software business that unfortunately fit the latter category. The founder was still nominally CEO. But he was rarely seen. When he was, it would be in sporadic short bursts. He was enigmatic at best and was widely feared by the employees due to his erratic behavior. Included in this odd behavior were swift firings for unknown offenses.

He had also installed his 20-something son as president, who ran the company “day-to-day”. To the extent it was being run at all. He was nearly as erratic as his father. Modeling his management style after dear old Dad,  he evoked almost as much fear. Not to mention considerable loathing.  Decisions appeared arbitrary and based upon the ever-changing moods, often coming down from the top by fiat. No one was there to call out the CEO or the president on their curious decisions and behavior. It was a classic situation of the “emperor having no clothes”.

Several other daughters, daughters-in-law, and other family members held high positions. With more children still too young, but considered eventually on the way into the family business. In addition, many friends of family members held positions higher than their qualifications would otherwise warrant. No family members were held in high regard by the other employees. The environment was punctuated by constant gossip and complaints about the latest nepotism-driven folly. Even the friends of the family who held nice jobs due to their connections often joined in on the trashing. The cultural well of this company was poisoned beyond hope. The company is stuck in neutral, although it’s in a great, fast-growing market segment.

Family isn’t always fatal

Nepotism isn’t always a fatal flaw, however. I also know of a large publicly traded technology company, wildly successful, still run to a large extent as a family business. This company also contains quite a bit of nepotism, which hasn’t helped from a corporate culture perspective. But they’ve done so much else right; they’ve overcome this weakness.

I have encountered other family-founded software companies with several family members in leading management positions. All were very competent, and the companies quite successful. Tech companies are often complex animals. Success or failure can’t be defined by a single characteristic. But as I implied above, family-run tech companies are a unique situation. Whether a company is great or awful often depends on the positive or negative qualities of its founding family. The result of this concentration of power is that family companies at their best can be among the cream of the crop. At their worst, they can be the most dysfunctional companies of all.

So, what are the best practices a founding family can follow to optimize the performance of this important asset? All while retaining the unique qualities of the “family business”? Let me offer a few suggestions:

Objective & Transparent Evaluations

Maybe the most important thing for a family-run company to embrace is OBJECTIVITY. It becomes very easy for the controlling family to habitually make decisions privately with their subjective decision-making process. This is fine as long as the company essentially IS the family. However, once a company grows large enough that a significant number of non-family members depend upon the company for their living, this often becomes problematic. If you want a motivated workforce, objectivity and transparency are generally critical components in building a positive culture, as discussed in the next item.

Build and Protect a Positive Corporate Culture

As mentioned above, upon hiring employees outside the immediate family, you have a corporate culture to worry about.  An arbitrary or secretive decision-making style can poison the cultural well. This is true whether it’s deciding on the big-picture company strategy or something as personal as performance reviews and promotions. Employees need to feel they’re part of it–family members or not. If everyone doesn’t believe that they are involved — and stand to benefit– issues will begin to build. At best, you’ll have an obedient but not highly motivated workforce. At worst, you’ll have a palace revolt at your doorstep. In either case, it’s not the best way to create value for the family in the long run. To maximize value creation via corporate culture,  treat your employees to the greatest extent possible as partners(owners). NOT like any other disposable asset (desk chairs). Owners work much harder than lemmings.

 Independent Board for a family business

Even though the real board of a family-run company is the family itself, I still feel there is value to appointing an independent board to at least advise, if not oversee, the company. The key is that it needs to be made up of strong, independent folks who don’t have close personal connections to the company. If you fill it with trusted friends, cronies, and hangers-on, the board won’t serve a purpose other than as a rubber stamp to family decisions. This board needs to protect the family from itself, especially the “emperor has no clothes” syndrome. This commonly occurs due to the isolation of the “elite” family members running the company far from their mainstream employees. If this board won’t speak up and tell the truth, no matter how difficult–it won’t be worth the trouble of putting it together.

Family members don’t ALWAYS have to run the family business

There is a strong tendency in family businesses for a family member to be the CEO, for obvious reasons. But is this always the right thing to do? Some generations of families are stronger in business than others. Not everyone is cut out to be a CEO or an executive VP. But they might serve the company well in an individual contributor role. It’s important to find the right level/spot for each family member. Too often, there is pressure to push relatives into roles they are poorly suited for.

In addition, some family members don’t belong in the family company at all. For some family members, it’s better for all concerned to let them find their way outside the family business. In these cases, all family members can still benefit as shareholders.

Lastly, in the case where there isn’t a family member at a particular point in time with the right mix of leadership, experience, and technical skills to be CEO. Why not appoint a trusted, unrelated professional as caretaker to run the company? This will allow family members of the next generation to be groomed for leadership. This may be the best move to preserve the company as an asset for all family members in the long run.

Hold Family Members to a HIGHER standard

If you privately asked most employees of family-run companies who AREN’T members of the controlling family, undoubtedly you would hear many stories of nepotism. There is a basic assumption that family members in companies receive special treatment. The leaders of some family-run companies wouldn’t even deny this. Some feel it’s not only their right, but the right thing to do. However, once your company reaches a certain size, this can reduce the motivation of other employees and damage the overall company performance.

Even when it isn’t true, this assumption of preferential treatment can be damaging. Appearances matter–perception becomes reality from a company culture perspective. Because of this, I strongly recommend that family members be held to the highest standard possible–even higher than other employees. Promote family members a year late rather than a year early. Plan early and make sure family members gather impeccable credentials for their role. If a family member and a non-family member bring different views on a topic, make sure the non-family member can win the day when they have the stronger argument.

If you follow some of the practices I’ve laid out here, you’ll have a stronger chance of the best of both worlds. A tightly run, focused business that also benefits from strong employee contributions to build a valuable asset for the family in the long run.

What are your thoughts on best management practices for family-run businesses? I’d love to hear your own experiences. Post a comment so we can all benefit from your experiences.

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