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Family-led or family-run businesses across corporate and small business segments form the backbone of the economy, generating approximately 70 percent of the GDP. Family-run businesses contribute a major part of the production output and employment.
The fact that a majority of the BSE500 companies are family-controlled exemplifies the role of family-run businesses in driving the economy forward. The wave of liberation in the 1990s and the arrival of multinational corporations in India posed an existential threat to family businesses.
However, family businesses managed to navigate the transitional phase well and scaled as well as stayed relevant, banking on their inherent ability to make decisions quickly, coupled with their strong market connect. The credibility of the founders and their risk-taking abilities ensured the sustainability of the family-controlled business ecosystem.
The key metrics of business expansion such as product or service diversification, development & broadening of the addressable market, and fund-raising used to be managed in a fairly academic fashion in the 90s and even the early 2000s. Several family-owned companies witnessed robust growth in the initial stage thanks to the enterprising approach of the families at the helm.
However, the advent of digitization and hyper-competitiveness has necessitated the need to optimize cost and operations, deploy new-age technologies and sustain customer loyalty. An increasingly competitive business environment calls for broad-based capability building and process transformation to sustain and grow one’s business.
Transformation capability has become critical in the era of volatility, uncertainty, complexity, and ambiguity (VUCA). The next generation of family-run businesses understands that reality and is working towards expediting the transformation of their companies and business models.
The emergence of corporate venture capital or CVC is one such emerging aspect of that transformational change in the family business framework. JSW Ventures, the early-stage, technology investment arm of steel and energy conglomerate JSW Group is one such CVC.
CVCs are investing in start-ups & early-stage disruptive businesses that have the potential to gain market leadership in a cost-efficient manner. Such CVC arms not only pave the way for start-ups to unlock value but also help family businesses in building portfolio companies that are aligned with the respective organizations and business visions.
While the CVCs run a completely independent business model, it can potentially give insights to the group on how to adapt some of the new-age technologies they see in the market across their core businesses. The JSW group has now set up JSW One which is a one-stop digital marketplace for all the group’s industrial products including cement, steel, etc.
Technology-first approach is another key driver of the transformational scale-up. The introduction of cloud hosting, AI, etc. is a great way to enhance operational efficiency. But, to make that transformation sustainable, well spread out, and result-oriented, identifying the growth decelerators and eliminating those with precise technology intervention is crucial. Family businesses irrespective of their sizes now realize the opportunity cost of “technology inertia” or digital inaction, especially after the downfall of celebrated brands like Kodak.
Therefore, to stay on the path of accelerated and scalable transformation, companies need to deploy cost-effective technologies in a step-by-step manner, if the outlay of full-fledged technology deployment proves to be a deterrent. Partnering with vendors that offer cost-efficient technology solutions can help family businesses that may be apprehensive of their ability to attract, hire and retain new-age tech talent.
Managing capital expenditure and operational expenditure to efficiently scale the transformation may not be a challenge for well-capitalized businesses. But, for small and medium-scale family-run businesses, fundraising is one of the key catalysts for keeping up with the change.
So, they must develop an effective capital structure to bridge capital gaps. Going beyond asset-backed financing, small and medium businesses are opting for hybrid fund-raising instruments consisting of debt and equity when the businesses reach an inflection point.
As valuation repricing kicks in, promoters are keen to raise funds without diluting their equity stakes. Tapping an alternative source of equity funding through the BSE SME platform and NSE SME platform ‘Emerge’ is another option to accelerate the pace of transformation for utilizing emerging growth opportunities. Financing needs vary across different stages of the life cycle of business.
Therefore, getting the right fundraising advice plays a crucial role in helping small-scale family businesses explore alternative financing and fund-raising routes to drive transformation and build scale. The enabling business environment has lowered entry barriers for companies with disruptive business models to challenge established systems and processes.
Therefore, in a dynamic environment, hitting a growth plateau is the last thing new-generation family businesses want. No matter which phase of transition the business is in, promoters need to ensure that they are constantly looking ahead and trying to keep abreast with the latest trends in the industry.
The spirit of transformation needs to be deeply ingrained into the core ethos of the institution to maintain market-leading positions in a fast-changing business scenario. Change must begin at the top in family-owned traditional businesses.