Challenges To First Generation: Shift In Mentality

Every first generation entrepreneur succeeds by taking huge risks and pursuing opportunities regardless of the available resources under his control. The one common trait is passion— passion about the business and the belief that their judgment about the market is right even in the face of naysayers who discourage them. Because of this passion, entrepreneurs tend to be very attached emotionally to the business that created their initial wealth. The original business is like another child, which is sometimes difficult for founders to assess objectively.

In the beginning, a business family’s wealth is determined by the success or failure of the original business. When the business is growing, the entrepreneur puts all of his limited capital into the business and hopes that the business makes it to wide adoption by its target customers so that the business gets to the minimum scale for it to be profitable. If he succeeds in doing that, at some point, the business starts creating extra cash flow beyond what is needed to support the current scale of operations.

At this point, the family’s wealth accumulation may not necessarily have to be tied to the original business. The business family has three general options:

• Further invest the extra capital generated by the business back into the business to continue growing;
• Deploy some of the capital in other operating businesses with good growth potential and in which the business family has expertise; or
• Create a diversified financial portfolio for wealth preservation

What is important here is to shift the mentality of the family from focusing on the success of the business as the measure of the family’s success to focusing on the growth and risks embedded in the family’s overall asset portfolio. The mentality should become how does the family grow its overall wealth over time and meet the family’s needs from generation to generation, rather than how does the family grow the company over time. This means that the family needs to rise above the company view to develop strategies for the family’s wealth with the original company as part but not the entire strategy.

The main reason that this shift is needed is because once the family has accumulated some level of wealth, the original business may or may not be the primary driver of continued wealth accumulation for the family. Whether it is or not depends on many factors such as where is the industry along its life cycle, what is its competitive position within the industry, and are the next generation interested and capable of leading this type of business.

However, in order to make this shift in mentality, the founder needs to get some distance between him and his founding business, become less emotionally attached to it, and therefore gain more objectivity.