Report on

Future of Family Businesses

In

Family Business and Entrepreneurship

By: Dhrumil Shah (400038)

S.Y. BBA

On: 21st

May’15

Submitted To: Mr. Atul Suvagiya

Mr. Durgesh Pandit

Acknowledgement

I would like to thank the Programme Director for introducing such a diploma

course into the BBA curriculum which gives a practical knowledge about the

family businesses in India.

I would also like to thank Mr. Atul Suvagiya and Mr. Durgesh Pandit for

continuously guiding and supporting me in the report.

I would also like to thank all my batch mates, my parents and my brother for

their continuous support throughout my project, without whom this project

could have remained a mere pile of papers.

Introduction

Family firms have been crucial features of the business landscape for centuries

and remain important today. They can be small, medium, or large and have

appeared in all sectors and in all three industrial revolutions. Throughout they

have _ an important role in employment, income generation, and wealth

accumulation. This makes them remarkably hard to describe as they are

multidimensional, and no single definition fully captures their intrinsic

diversity. However, a broad general definition of the family firm is one where a

family owns enough of the equity to be able to exert control over strategy and

is involved in top management positions. This definition does transfer through

time and space, is one of the most used today, and so can be considered a

useful benchmark. However, the international range of institutional, cultural,

and governance arrangements means that it must remain a starting point

against which to explore variety, rather than an end point on which a rigid

taxonomy can be built.

A family business is a commercial organization in which decision-making is

influenced by multiple generations of a family- related by blood or marriage-

who are closely identified with the firm through leadership or ownership.

Family firm is a corporation that is entirely owned by members of single family. It is also known as company owned, controlled and operated by members of one or several families. In India, family businesses range from the small mom-and-pop store (or kirana)

to large conglomerates with equally varied business interests. As their growth

has skyrocketed, many have stepped outside their zones to acquire companies

in new industries and geographies. Their contribution to India’s growth is also

being increasingly recognized.

Future of Family Businesses

Business families are now ensuring a more representative family charter that

has enough room for younger members to be able to work on their own plans

that are different from existing family trade. This is a marked departure from

the earlier tradition where family elders decided on how the business would be

handled and what the responsibility of each member of the family would be.

The family businesses in India have contributed to the economy significantly.

They have been gaining growth and importance over the past decade. After

the Liberalization, Privatization & Globalization, 1991 policy, the exports have

risen 116 times when compared to exports during 1970-71. A part in this

increase has been contributed by the family owned businesses. 68% of the

family businesses are into exports which show the scale of operation of these

businesses and also their bright future, which might surpass the giant MNCs

also.

The following data also backs up the fact that the family owned businesses will

have a thriving future:

Family businesses account for 90% of gross industry output.

As per the KPMG 2013 survey,

o Family companies account for two-thirds of India’s GDP.

o 79% of organized private sector employment is generated by

family businesses.

o 27% of overall employment is generated by family firms.

Family businesses form a backbone of the Indian economy with gross

output equaling about 60% of GDP or about 90% of India’s industrial

output. In 2011, overall gross output produced by family businesses

amounted to about Rs. 4384 Crores.

More than 95% Indian companies are family run.

80% support employment in areas of operations.

These evidences are sufficient to support their halcyon future in India. So, it

implies that investing or being a stakeholder with a family run business is as

good as gold.

The following data is a measure of the impact and scope of family enterprises

globally:

John Davis from Harvard Business School says that family firms account

for 2/3 (two thirds) of all businesses around the world.

An estimated 70%-90% of global GDP annually is created by family

businesses.

Between 50%-80% of jobs in the majority of countries worldwide are

created by family businesses.

85% of start-up companies are established with family money.

In most countries around the world, family businesses are between 70

and 95% of all business entities.

PrivateWaterhouseCoopers (PWC) in the year 2012 stated that 65% of

family businesses are looking for steady income growth over the next

five years.

Reasons for success of Family Businesses

The reasons behind the family businesses achieving greater heights are:

Contributing to economic development: Family business play crucial role in economic development of most of the countries. Retail sector, small scale industry, and service sector are owned by family business.

Spirit of entrepreneurship: Family business as contributes towards development and has been successful in country like India it paves way to various families to initiate and bring up new ventures in country.

Philanthropy: Family business in India along with their development have also concentrated towards welfare of general public by investing on hospitals, educational institutions, construction of roads etc.

Trust Lowers transaction cost: Partnership and other forms of business involving outsiders usually lead to conflict in long run. In case of family business as all the parties in family are affected by loss incurred in company do not involve any sought of conflict and difference in point of view arises they try and solve it internally in the family ensuring business is not affected by the same.

Small, nimble and quick to react: As managing team size in family business is small compare to other form of business decision making process involves less period of time which helps to take timely decision.

Information as source of advantage: As family business is private firm it is not required to take decision in accordance with pressure from other sources and strategies of business need not be revealed to outsiders of business.

Conclusion

Family firms are dominating global business today. To ensure longevity, they must phase their many challenges through long-term planning. The first step is to design a road map for the future governance of the firm and the family.

I'd say family businesses have a very bright future in India. The biggest reason for the failure of family businesses was that they weren't able to manage the transition between generations smoothly. Indian family business enterprises also recognise disadvantages like attracting non-family staff, challenges around succession, family politics and access to capital in running their businesses.

Over time, one learns how companies have managed transitions and can work

through these. There are forums and experts available to see companies

through this. Consequently, there is a lot more knowledge available and a

much greater opportunity for success if transitions go through smoothly.

Luckily in India, there is a belief in preserving family businesses within the

family, similar to Europe and Britain. Consequently, given the strong family

values and exposure to best practices and good governance I don't see why

they won't do well in the future.

Family businesses have become much more hard-headed. The most important

priorities are to remain in business and improve profitability.

Bibliography

PrivateWaterhouseCoopers (PWC)

KPMG

Slideshare

entrepreneur.com

articles.economictimes.indiatimes.com

redseerconsulting.com

thehindu.com

encubeindia.com

Report on

Role of Venture Capital Funds in India

In

Family Business and Entrepreneurship

By: Dhrumil Shah (400038)

S.Y. BBA

On: 21st

May’15

Submitted To: Mr. Atul Suvagiya

Mr. Durgesh Pandit

Acknowledgement

I would like to thank the Programme Director for introducing such a diploma

course into the BBA curriculum which gives a practical knowledge about the

family businesses in India.

I would also like to thank Mr. Atul Suvagiya and Mr. Durgesh Pandit for

continuously guiding and supporting me in the report.

I would also like to thank all my batch mates, my parents and my brother for

their continuous support throughout my project, without whom this project

could have remained a mere pile of papers.

Introduction

The Venture Capitalists Financing refers to financing of new high risky venture

promoted by entrepreneurs who lack experience and are new to the market.

The venture capitalists are persons who indulge in the activity of venture

capital financing. They take calculated risks and invest their money with these

young and amateur entrepreneurs.

They provide finance to these entrepreneurs by investing in equity or debt

securities. But, the contribution in the equity share capital should not exceed

49% as it would hamper the ownership of the business. These venture

capitalists invest either by seed capital or by start-up capital. They not only

invest in these firms by the way of finance but also support in sales strategy,

business networking and management expertise.

They do not compromise on the time to analyze the business plan put forward

by the entrepreneurs as the level of risk is to be determined by them. They

analyze on the basis of some specified parameters and also they have some

pre-determined rate of return that should be received on any investment they

make in these entrepreneurial ventures.

Entrepreneurs find it difficult and costly to get early stage financing. But,

having a clear and a strategic business plan for the venture capitalists gets

them in a comfortable position to acquire finance easily.

Venture capitalists also aid these entrepreneurs in their different stages of

start-up life cycle.

In the initial development stage as 'seed capital' for converting an idea

into a commercially viable entity.

Implementation or 'start-up capital' when all is ready to commence

production.

Additional capital to overcome manufacturing teething problems.

Establishment capital to facilitate rapid expansion of an established

company.

Evaluation of Venture Capital Industry

The need for Venture capital industry was actually felt after the LPG policy

when there was a requirement for bulk supply of funds for fulfilling the

business opportunities. In the 21st century, the IT industry witnessed a bullish

market and the need for funds was increased, which gave the Venture Capital

industry a boost too. But soon the markets started to decline and the venture

capital industry was shattered. This problem was not only faced in the Indian

economy but the rest of the world was also affected.

To tackle this problem, Securities Exchange Board of India (SEBI) took charge to

control the situation before it could get worse. It gave a detailed guideline

wherein a role, expectations, operationalisation and reporting guidance had

been ensured for their proper adherence.

Indian entrepreneurs had been perceived as lacking conceptual and analytical

skills to have an unambiguous rationalization of the fund requirement and

convincing power to justify their propositions to the venture capitalists.

Venture capitalists also face some challenges when the Indian entrepreneurs

prefer raising money from their friends and relatives. They are also exposed to

exit challenges due to shallow capital markets in India and limited

opportunities for selling of their stake before an Initial Public Offering (IPO).

Having discussed their challenges and threats, let us throw some light on their

growth opportunities. Industrial Development Bank of India (IDBI), Industrial

Credit and Investment Corporation of India (ICICI), and State Finance

Corporation (SFC) were responsible for the growth of the Venture Capital

financing.

In the year 1988, the Government of India announced guidelines for Venture

Capital Funds (VCFs).

A Technology Development Fund (TDF) financed by the levy on all payments

for technology imports was established. The fund was meant to facilitate the

financing of innovating and high risk technology programmes through the IDBI.

In the year, 1996, SEBI issued guidelines for Venture Capital Funds. These

guidelines described the funds as established in the form of a company or trust

which raises money through loans, donations, issue of securities or units and

proposes to make investments in accordance with the guidelines. Since then

the guidelines have been amended from time to time with the objective of

fueling the growth of Venture Capital activities in India. This would encourage

more funds to be set up to give the required momentum for venture capital

investment in India.

Indian startup fraternity has always had the complaint that the best talent in India is not attracted by startups. I believe that this is largely a function of the risks and rewards that startups have represented. It is not surprising that in an environment, where doing a startup may involve peddling family jewels, not many first-time entrepreneurs may come forward. Risk capital fills that gap in the ecosystem by providing the initial support. More importantly, it amplifies the potential rewards by providing growth capital once an idea takes off. This decrease in risk perception, and increase in potential upside, is a key driver to new entrepreneurs starting their businesses. Beyond entrepreneurs, the notion of capital exit as an integral milestone for start-ups creates a currency to attract next line of talent – It is not surprising that most venture backed companies tend to have stock options as a cornerstone to attract talent.

India is an early venture market. As a result, even when extremely experienced entrepreneurs form startups, they are often under-exposed to the nuances of high growth businesses, creating and realizing strategic value, or being able to tap into a recruiting network. Venture capital players often have the scale within their portfolio to build experience and relationships in these areas, and hence are able to bring those learnings and networks to bear for their portfolio companies. The experience of global venture capital players such as Canaan, extend beyond the geography or time constraints of the Indian market, and the partnership as a whole can bring a rich set of learnings to the table.

Factors to be considered by Venture Capitalist

There are some factors on which the Venture Capitalists consider before

providing finance to any project. They analyze the business plan according on

the basis of the following factors:

Level of expertise of company’s management:

The success of the plan depends on the quality of the team that is going

to work on it. The team should be highly skilled in order to lure the

venture capitalist to invest in the business. The team should also show a

high level of commitment towards the project.

Level of expertise in production:

The managers should possess the necessary technical ability to be able

to develop and produce a new product. If there is a absence of the

technical skills then the venture capitalist might not feel confident in

investing in the business.

Nature of proposed product:

The proposed product should be technically feasible and that will be

checked by the venture capitalist by employing experts who will

examine the business plan thoroughly. These experts are appointed

according to their fields of expertise.

Future prospects:

The future of the proposed business product should be promising in

order to make the business lucrative for the venture capitalist. This is

necessary in order to compensate the risk. This requires the venture

capitalist to study a detailed business plan, outlining each and every

aspect of the business.

Competition:

The venture capitalist should be satisfied that there will actually be a

market for the new product that is being proposed by the businessman.

They analyse the business research carried on by the entrepreneur.

Risk borne by the entrepreneur:

The venture capitalist will ensure that the entrepreneur also bears a high

degree of risk. They also demand for a high level of commitment from

the entrepreneur for the project as they themselves will have a lot of

loss, should the project fail.

Exit route:

In case, the project fails and turns out to be a disaster, then the venture

capitalist should not be facing much difficulty in recovering the amount

given as seed capital. In order to minimize the risk of loss, the venture

capitalist tries and establishes a number of exit routes. They can be

through sale of shares to the public, sale of shares to another business,

either in the same industry or another, or by sale of shares to the

original owners.

Board membership:

The venture capitalist require a say in the business as they are going to

invest in the business and any wrong decision taken by the owners might

lead to a loss in the business. They require a place on the board of

directors. This will help in being a part of the decision making process.

Role of Venture Capital Funds in India

Several venture capital firms are beginning to invest in building these

relationships to the benefit of their portfolio companies. In my own

experience, I have seen this to be extremely valuable to the industry as well,

because it exposes them to the innovation that is happening right around the

corner. The startup activity in general, and venture capital enabled innovation-

led activity in particular, thus has an impact much beyond the revenues and

profits of the startup itself. In fact, most mature countries have recognized the

key role that external innovation can play in continuous evolution and

competitiveness of the large-scale private sector businesses.

The venture capitalists take different role positions in financing a business and

they do not perform the same role every time like:

Venture partners

Principal

Associate

Entrepreneur-in-residence

Venture Partners:

Venture partners are expected to source potential investment opportunities

("bring in deals") and typically are compensated only for those deals with

which they are involved.

Principal:

This is a mid-level investment professional position, and often considered a

"partner-track" position. Principals will have been promoted from a senior

associate position or who have commensurate experience in another field,

such as investment banking, management consulting, or a market of particular

interest to the strategy of the venture capital firm.

Associate:

This is typically the most junior apprentice position within a venture capital

firm. After a few successful years, an associate may move up to the "senior

associate" position and potentially principal and beyond. Associates will often

have worked for 1–2 years in another field, such as investment banking or

management consulting.

Entrepreneurs-in-residence (EIRs):

Entrepreneurs-in-residence (EIRs) are experts in a particular domain and

perform due diligence on potential deals. EIRs are engaged by venture capital

firms temporarily (six to 18 months) and are expected to develop and pitch

startup ideas to their host firm although neither party is bound to work with

each other. Some EIRs move on to executive positions within a portfolio

company.

Some other pivotal roles can be as follows:

Venture Capital Funds inject long term equity finance which provides a

solid capital base for future growth.

The venture capital funds injected by the venture capitalists act as a risk

sharing device for the entrepreneur. The venture capitalist is a business

partner, sharing both the risks and rewards via the above mentioned

way. Venture capitalists are rewarded by business success and the

capital gain.

The venture capitalist is able to provide practical advice and assistance

to the company based on past experience with other companies which

were in similar situations.

The venture capitalist also has a network of contacts in many areas that

can add value to the company, such as in recruiting key personnel,

providing contacts in international markets, introductions to strategic

partners, and if needed co-investments with other venture capital firms

when additional rounds of financing are required.

The venture capitalist may be capable of providing additional rounds of

funding should it be required to finance growth.

Conclusion

Venture capital investment is one of the most flexible form of financing

technology based or innovative business firms. It is a more wide way of getting

finances for investment in business enterprises which hold a bright future in

terms of profit and as well as growth.

Venture capital is a source of necessary risk capital like financing for shares. It

has now emerged as the best financing alternative in developing as well as

developed countries. Approximately 70 countries provide the facility of

venture capital investment to the business enterprises.

For a virtual capital investment, you need to have the following traits:

A business firm which has the potential to grow in near future

The investment should be for a long time like from two to ten years.

The business should have had invested in shares of established business

enterprises which hold a strong history of profits.

The risk level should be high of the ongoing projects in the firm that also

ensure high amount of profits.

Once the funding is done, the investor must remain active.

Venture Capital funding is an increasingly important source for entrepreneurial

ventures in both industrialized and developing countries. Venture Capital

financing has become especially important in India in developing information

technology sector. India has a history of state-directed institutional

development with the exception that government is avowedly hostile to

capitalism; government control over economy and the bureaucracy had a

reputation for corruption. Such an environment would be considered hostile to

the development of an institution like Venture Capital. India has a number of

strengths for venture fund development: an enormous number of small

businesses, public equity market, and low wages not only for physical labor but

also for trained engineers and scientists, a home-grown software industry that

became a significant player internationally in the mid-1990s.

Bibliography

iamwire.com

businessinsider.in

iosrjournals.org

theeconomictimes.indiatimes.com

epaper.livemint.com

ventureden.com

iked.org