Why VCs Rarely Back “Family” Founders

29 Aug

I recently met with a promising startup led by a husband-and-wife founding team. This was not a standard investor pitch meeting. I had known the husband of the duo for several years and agreed to meet informally to be brought up to speed on progress at the company.

Admittedly, it is not often that I meet with a founding team composed of individuals connected via bonds any deeper than college, a previous work experience, or a long-standing friendship. Truth is, start-ups founded by husband-and-wife teams or by those connected through familial bonds amount to a tiny fraction of the companies that successfully raise venture funding each year.  On the one hand, this fact might appear odd given how signficant “mom and pop” businesses factor into the nation’s economy and, indeed, its economic history. The cliché that small business is the backbone of the US economy is only accurate because “mom and pop” or family dominated businesses comprise the greatest number of vertebrae in that very same backbone. The dearth of family-founded venture-backed start-ups, therefore, makes for an intriguing discussion.

To be sure, there have been family-founded or husband-wife startups that have raised venture money and gone on to be quite successful. WebMethods is one such company. However, the bias in traditional venture circles against investing in husband-wife and family-run startups is long-standing and rooted in some uncomfortable realities.

1. Idiosyncratic risks in a husband-wife or family-dominated team. It’s axiomatic that investing in young, unproven companies involves a great deal of risk. To be successful, a venture investor must adroitly balance that risk. That involves making choices and tradeoffs over which risks are tolerable and acceptable as part of the venture process, and which risks are not. What differentiates family-run or husband-wife startups to a venture investor is that they introduce risks that are unique by their very nature.  Hence, these risks are idiosyncratic and not in evidence at startups backed by the more common assemblage of former colleagues, college roommates, and friends.

One such risk is that of divorce in a husband-wife team or a severe disruption in a familial relationship in the case of a startup team dominated by family members. Both can cripple management effectiveness.  Any venture investor who has been involved in the removal of a founding member from a portfolio company can attest to how complicated and disruptive that process can be. Add to that the aspect that the co-founder being removed could be bound by marriage to another co-founder–with the common circumstance that one co-founder is engineering the removal of the other–and one can quickly see what a morass this situation can become. Sons firing fathers or brothers firing brothers play out no less dramatically and painfully for the companies and the investors involved. The emotional fallout in such disruptions can all but disable a company.

2. Recruiting difficulties. For any emerging growth company to scale effectively, it must attract a world-class team. However, top management talent interested in advancement and increasing responsibilities will typically avoid a husband-wife or family-dominated startup where decisions on hiring, promotions or compensation could be colored by family relations or other marginalia. Accurate or not, the perception will persist that a talented manager will be unable to ever take the top leadership post at a company where the competition for that post is likely a family member. Additionally, few people who ever sat through a tense Thanksgiving dinner of their own relish the idea of ever getting in the middle of a familial or matrimonial spat, much less on a daily basis.

3. Lack of defined roles. Finally, there is the touchier discussion about the importance of clearly defined roles in both the business context and in the familial/marital one. Couples and family members that go into business together too often learn that this is a decision that can damage their underlying romantic or familial bonds in ways they never imagined. The bluntness and constructive criticisms that must occur in order for there to be efficient business communications can often fray emotional connections and strain relationships, sometimes permanently. Roles get convoluted. Spouses and siblings lose their identities in service to the needs of the business and find they have trouble talking about anything outside of work but work itself.

As any management textbook will attest, the effective management of teams requires clear leadership, objectivity in decision-making, some reasonable approximation of “professional boundaries” and a clear demarcation of roles and responsibilities. The blurring of lines that comes from founders and/or managers having one role at the office with their “colleagues” and another role at home too often flies in the face of that reality for venture investors to ever become sufficiently comfortable in order to proceed with an investment.


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