Article 32 – Legacy or cashing out?

by Tan Thiam Hock

Entrepreneurs need to decide between maintaining control and maximising wealth

Last night, I had a discussion with a mixed bunch of lecturers, students and working professionals on entrepreneurship in our local Monash University. I must have disappointed Dr Vicki Little, the bubbly Kiwi senior lecturer of the Aussie Monash Business School when I told her that I had no slides, notes nor power point presentation. All her previous invited speakers were well prepared with structured Hollywood presentations. This Chinaman’s hope of hitting the lecture circuit evaporated at the footsteps of Monash Plenary Hall. (Sigh) Back to being a farmer.

One of Vicki’s students is currently doing her PhD thesis on family entrepreneurship, deep diving into three generations and legacy comparisons between different families in Malaysia. Another participant from Diary Farm pointed out to me that his head honcho Taipan in Jardine Matheson Hong Kong is a fifth generation Keswick. Why then, Bill Gates, Warren Buffet and the late Steve Jobs leave no legacy nor business for their next generation?

I believe there is a correlation between the mentality of the founder startup and the year of the startup. Bear with me as I start off my BS*!# thesis by arguing that entrepreneurs from the early 1900s till 1980s have the tendency to be owner control entrepreneurs. Their only source of capital then was their own savings and angel-like/passive investors and eventually a listing in the stock exchange of which, they remain a controlling substantial shareholder. With the world growing rapidly due to industrialisation, they would like to handover a thriving business with great potential to the next generation. Rarely do they consider selling out if their children show positive signs of interest in continuing their legacy.

In the last 20 to 30 years, the rapid industrialisation led to over capacity in manufactured goods and created intense competition in almost all sectors of the economy. Suddenly, the entrepreneurs find the going tough, the future cloudy and they have to compete with more educated, well funded and smarter competition. The accumulation of wealth over the last 50 years created huge pension funds seeking for higher returns. This led to the opportunistic emergence of venture capital, private equity and super fund managers.

Entrepreneurs who seek capital investment from venture capital tend to cede control and become minority partner entrepreneur. Private equity will throw obscene amounts of money at established entrepreneur businesses based on such high valuations that make the entrepreneurs forget that they have children willing to take over their business. After all, business is getting tougher by the year so why bother? The best part is, these fund managers are such great creators of value on paper that they are able to resell the businesses for another obscene amount of profit. My BS thesis conclude with an understanding that, the more successful your business becomes, the more likely you will sell out. As long as they offer you an obscenely enriching experience.

In his book, The Founder’s Dilemma, Prof Noam Wasserman, an Associate Professor from Harvard Business School, researched 3,607 startup companies in the US over the last 10 years and interviewed 9,900 founders and co-founders. Even though most of the high potential startups were technology and life sciences, the journey of the founder is similar to other business setups; from pre-founding career decisions to actual founding dilemmas to beyond the founding team to investor dilemmas to founder-CEO succession, to final exit.

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Wasserman has cleverly described the wealth versus control dilemma, in a decision-making and consequence table. He has defined the different decisions an entrepreneur makes is based on whether he is an entrepreneur who prefers to maintain control in ownership and management, or if he prefers to maximize wealth, being a minority partner and willing to share control but moving at a faster speed to achieve wealth. For budding entrepreneurs, the first dilemma you will face will be to decide whether you are an entrepreneur who wants to maintain control or you prefer to maximize wealth. Whichever route you take, your decisions along your journey is nicely summarised in the table below. Good luck!

And to those who have been asking me as to when is it a good time to come out on your own, Wasserman’s research points to founders starting out after an average working experience of 14 years. Since I have no business to hand down to my children, I will send them this article as a reminder to study hard in the university and get good grades so that they can find a decent job in the bleak future. Or in worst case scenarios, they can work in my vegetable farm. Hopefully, after an expensive tertiary education, they can differentiate between FarmVille on their MacBook Pro and the real farm in our warm sunny Malaysia.

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