Report on Future of Family Business

Report on Future of Family Business

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  Report on Future ofFamily 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
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  Acknowledgement I would liketo 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.
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  Introduction Family firms havebeen 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.
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  Future of FamilyBusinesses 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.
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  These evidences aresufficient 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.
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  Reasons for successof 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.
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  Conclusion Family firms aredominating 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.
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  Bibliography  PrivateWaterhouseCoopers (PWC) KPMG  Slideshare  entrepreneur.com  articles.economictimes.indiatimes.com  redseerconsulting.com  thehindu.com  encubeindia.com
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  Report on Role ofVenture 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
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  Acknowledgement I would liketo 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.
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  Introduction The Venture CapitalistsFinancing 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.
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  Evaluation of VentureCapital 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
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  fueling the growthof 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.
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  Factors to beconsidered 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.
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   Risk borneby 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.
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  Role of VentureCapital 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
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  have worked for1–2 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.
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  Conclusion Venture capital investmentis 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.
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  Bibliography  iamwire.com  businessinsider.in iosrjournals.org  theeconomictimes.indiatimes.com  epaper.livemint.com  ventureden.com  iked.org