Pursuing the exit event: Why software startups aren't family businesses
I am a big fan of family businesses. The plumbing company that services my building is a multi-generational family business, as is the management company that maintains the building. Many restaurants in my neighborhood are family businesses. The place where I buy home improvement products and lumber has been a family business since 1923.
Family businesses imply continuity and a sense of personal well-being. Real people are in charge and they’re in it for the long term, rather than a faceless group of executives who come and go with the best compensation package.
Not all family businesses are small mom-and-pop shops, though. That aforementioned home improvement retailer is large, with five locations in southern California. Here are some other well-known examples of family businesses:
- The Walton family has run Walmart since 1962.
- The Ford family still controls the Ford Motor Car Company.
- The Mars family owns the eponymous candy maker.
- The Murdochs own Fox.
- Michelin Tires is run by… you guessed it, the Michelin family.
However, as much as I like the idea of a family business, I never started one. I’m a software developer, and software businesses don’t seem conducive to family ownership. Family-business software companies, such as Epic Systems, are the exception and not the norm. Most software companies are big businesses that are publicly traded and run by professional managers. Consider:
- Bill Gates only has a 1% stake in Microsoft.
- Jeff Bezos and his ex-wife MacKenzie only own 14% of the shares in Amazon, which is insufficient to be a controlling interest. They don’t call the shots; as CEO, Bezos could get fired should things go south.
- Mark Zuckerberg owns 58% of Meta’s shares and his wife Priscilla Chan is on the company’s board, so the “family” does have control of the company. However, in 2015 Zuckerberg stated his plans to give away 99% of his shares during his lifetime, which means the business won’t pass on to his kids.
So, if creating an intergenerational family business is not in the cards for a software developer who wants goes out on their own, what is the motivation to start one? The answer is: an exit event.
When the company is the product
Many if not most new software companies are startups funded through multiple rounds of investor capital. The founders might initially put up some of their own money or use startup capital from friends and family.
As the business grows, it needs more money to cover expenses incurred until it produces income, if any. Typically this additional funding comes from angel investors and then professional venture capitalists.
No matter the source, these investors want a return on their investments. That return is realized when the company is sold or goes public. Few investors patiently wait to profit from their investment; most want a return within five to ten years. Venture capitalists are typically in it for the short term, seeking to invest some money for a while and then take out a lot more when the company is sold or executes an IPO.
In the world of venture capital, the investment target — the startup — becomes the product.
When the goal of a startup business is that the company is to become a product for sale, and its services or products are merely value-added features, priorities change. Loyalty between employer and employee, from both perspectives, goes by the wayside. Commitment, trust and sacrifice for the common good — qualities that are foundational to loyalty — become unachievable in this scenario because they take time, often many years, to foster and flourish.
In the investor world, time is a limited resource. Investors want as much money as possible in the shortest amount of time necessary. The goal is not to stay in, but to get out as soon as possible. Thus is the importance of the exit event.
Sometimes after an exit event a company’s founders stick around to run the business, as with Zuckerberg and Facebook. More often, the founders move on to enjoy the benefits of their newfound wealth, or start another company likely with the intention of another exit event. These people are known as serial entrepreneurs, and today many aspire to this career path.
The challenge of a small family-business exit
Don’t get me wrong. I find the notion of the family business endearing. Nevertheless, I am under no illusion about its shortcomings.
A family business has two types of people: those who are in the family and those who are not. At some point, non-family employees are “the help” that’s expendable if push comes to shove.
Also, there’s a saying that a family has a lifespan of about three generations:
- The first generation creates the business.
- The second generation keeps the business going.
- The third generation runs it into the ground.
To avoid that clichéd fate, a wise family treats the help well, and installs competent managers that can keep customers, vendors and employees happy while also navigate the quirks of inter-family squabbles.
Of course, serial entrepreneurship exists at the small business level as well. I know a person involved with small pizzeria startups, helping them to run at a profit and then sell them to families at an affordable price. This person literally creates businesses that transform into family-run companies.
But the central issue for most businesses is short-term vs. long-term interest. That’s a tricky path to navigate for any small family business, and particularly one focused on software.
In pursuit of the exit event
Transformational businesses take a long time to come to fruition. Alexander Graham Bell, Thomas Edison and Henry Ford had visions to build lasting businesses. So were Gordon Moore (one of the inventors of the semiconductor), Microsoft’s Gates and Apple’s Steve Jobs. They were in it for the long term; an exit strategy was the last thing on their minds. They saw the IPO as a financial mechanism to raise capital for expanding operations, not as a payday for investors.
But that was then, and this is now.
Today, it’s all about the exit. If you’re a software developer and you want to go out on your own, be prepared to do your investors’ bidding. Maybe you’ll get rich, maybe you won’t.
If you want a business you can hand down to your kids, you’re better off being a plumber. You’ll avoid the burdens that go with pursuing an exit event. As history has demonstrated, that business has good prospects over the long term.