The Views of Family Companies on Venture Capital

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The Views of Family Companies on Venture Capital:
Empirical Evidence from the UK Small to Medium-Size Enterprising Economy

This explorative research paper draws evidence from a database of small to medium-size unquoted private companies (n = 240) in the UK and reports on the family business and venture capital relationship from the demand side. Following the review of literature relating to financial affairs of private companies, the main research inquiries are outlined and a set of generic hypotheses is elicited based on the pecking order theory—that is, private companies, including family-controlled ventures, have a propensity to finance their operations in a hierarchical fashion, first using internally available funds, followed by debt and, finally, external equity (Petitt & Singer, 1985). Univariate statistical analyses confirm that family companies adhere strongly to the pecking order principles of financial development. The paper explores factors governing the rationale of owner-managing directors of private and family companies for considering venture capital dealings as well as main areas of concern about the deal structures. The paper then concludes with a discussion of the policy implications from the perspective of the owner-manager, financier, and enterprise policy maker. To encourage equity development of smaller privately held companies, particularly family firms, there is room for policy initiatives that respect the financial philosophy of private companies.

Family firms, generally defined as businesses either owned or managed-operated by the family (or its units), are the most prevalent form of business organization. For most developed economies, the family business sector is estimated to account for over two thirds of all enterprises and about half of the GDP economic activity (Gersick, Davis, Hampton, & Lansberg, 1996). Commentators view family firms as the backbone of the private economy, as they make a substantial contribution to national socioeconomic and entrepreneurial development (Connolly & Jay, 1996; Poutziouris & Chittenden, 1996; Neubauer & Lank, 1998; Leach & Bogod, 1999; Romano, Tanewski, & Smyrnios, 2000).

On the positive side, family firms are credited for nurturing entrepreneurial talent, a sense of loyalty, long-term strategic commitment, pride in the family tradition, and corporate independence. On the negative side, family firms can suffer from a lack of professionalism, nepotism, rigidity in adapting to new challenges, and family feuding. Conflicting family and business politics can undermine strategically planned ownership, leadership, and management succession, which can derail the development of the family firm. To safeguard family ownership, control, and financial independence from outsiders, ownermanagers of family firms often overlook growth opportunities (or even eschew growth), owing to heavy dependence on internally generated funds