Empower the Rising Gen: Create a Family Entrepreneurship Fund
Entrepreneurship is at the heart of all family businesses, but sometimes the entrepreneurial spirit can get lost within generations, making it difficult to encourage younger family members to be creative. A challenge that isn’t often considered or discussed is providing entrepreneurship opportunities for younger generations who might not want to be involved in the operating company. In many cases, future family members leave the business behind to pursue their entrepreneurial ventures.
If future family members don’t want to be involved directly with the family business, give them the opportunity to develop something they are passionate about. Many families provide loans for family members, but creating an entrepreneurial fund within a family office is a more structured approach to managing investments and supporting family ventures.
“Stay self-funded as long as possible.” — Garrett Camp, co-founder of Uber Technologies
Encouraging family members to stay “self-funded” – in this case, funded by the family instead of outside sources of capital – helps maintain control and alignment with family values, ensuring that the family’s legacy and vision are preserved and enhanced. By relying on internal resources and support, family members can develop their ideas with the security of knowing that their endeavors are backed by people who share a long-term commitment to the family’s success.
Best Practices for Creating a Family Entrepreneurship Fund
Professionalize the Pitch
Imagine a scenario where you’re at a casual dinner with your cousin, and he asks about a $500K investment for a tech startup he and his friend from college are excited about. The conversation includes general ideas and a pitch, and his excitement is infectious. You’ve had a few drinks and find yourself agreeing to the investment. The next morning, he follows up with numbers, and the startup is nothing like he described. Now you’re stuck having an uncomfortable conversation or, alternatively, investing anyway.
Scenarios like this happen every day and lack the structure necessary to ensure your family’s investment is a smart move. Instead, work with your family to create a professional process for how family members need to deliver pitches to the fund. Define what KPIs and metrics are needed, as well as the format for pitch meetings. Don’t be afraid to ask challenging questions and encourage older family members with more business experience to mentor and develop the ideas of younger members who are building proposals.
It’s important to review any investment policies within your family and outline the types of opportunities in which the entrepreneurship fund will invest. Also, determine if your family has any limits or restrictions on the amount of capital per project.
No one wants to fund a half-baked idea, but it’s even more challenging when family is the one who is asking and might take it personally if a proposal is rejected. By professionalizing the process, you protect the fund itself while also encouraging the formal development of entrepreneurial opportunities for family members.
Create a Voting Committee & Include Someone Impartial
Imagine the next day you’re chatting with your mother about your cousin’s start-up pitch, and she reveals that he also approached her. She rejected his proposal but told him to ask your uncle, who runs the family office, and he agreed to invest before your cousin had dinner with you. Now there is confusion about who in the family wants to invest and who doesn’t, leading to distrust and jealousy from other family members who were not asked to be a part of the investment.
This problem can be avoided by creating a Voting Committee of family members who will review and vote on proposals. Some families choose to include the process for creating this committee in their Family Constitution. At a minimum, the committee should have representation from each family branch involved. Including a non-family member on the committee, such as a board member or employee of the family office, is a great way of encouraging balance in the review process.
After determining how many members will be on the Voting Committee, outline term length and nomination procedures. For example, will your family nominate new members at an annual family meeting? Will those nominated have to prepare a statement on why they’d be a good fit for the committee? The committee should be multi-generational and have diverse professional experience, but it’s also important to make sure any family members involved will make good investment decisions.
Determine if voting will be done by majority or if it will be unanimous. If your family doesn’t have a constitution, some families draft an Entrepreneurial Fund Agreement with these standards and procedures outlined.
Properly Structure Deal Execution & Risk Tolerance
Once a family member gets their proposal approved, it is important to structure the deal execution for the investment. If it is an equity investment, what is the percentage of ownership the fund will receive? If it is a loan, what will the interest rate be? How will the investment be allocated? What is the pre- and post-money valuation? What are the milestones and performance metrics necessary for continued funding? What is the exit strategy for the fund? Clearly outlining these elements ensures a clear and fair deal that aligns with the fund and the family member.
Establish the fund’s risk tolerance and how it aligns with your family’s overall financial strategy. If necessary, make edits to the investment policy statement. Discuss what benchmarks to follow and any protective provisions within the deal to protect the fund.
Utilize Feedback Loops
Building trust and facilitating open communication throughout the process takes the burden off the family members who are developing business plans and spreads the responsibility of the investment decision to more members.
Feedback is especially important when creating and implementing the fund but should also continue as the fund becomes more established. Regularly review the fund’s performance and strategies with your family. Solicit feedback about the structure and governance policies and make changes accordingly. This can be incorporated into annual family meetings or can be separate and ongoing.
To ensure the entrepreneurial fund is successful, it is crucial to encourage risk development and frequent communication. Investing in start-ups and other ventures is risky, but it is a rewarding way of keeping future family members involved with the family while being empowered to create their own entrepreneurial legacy. As Peter Drucker wisely stated, “The best way to predict the future is to create it.” By fostering an environment that supports innovation and forward-thinking, enterprising families can secure their legacy for generations to come.
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Madeline Tolsdorf collaborated in the writing of this article.
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