Family Business - Freedom & Constraints

Family businesses are some of the most dynamic, profitable organizations in the world due to their nimble nature and permanent ownership structure. This week, we wanted to bring your attention to the India-based Poonawalla Family and their Serum Institute to highlight several key factors that illustrate both the freedom and constraints of family business.

1) Family businesses often have a smaller number of key decision-makers, which can result in more nimble operations. Typically, this means that decisions are made faster and without a lot of red tape:

"The only shareholder Poonawalla has to answer to is his 79-year-old father, Cyrus—one of India’s best-known bon vivants in his day and the man he credits for his own liberal attitudes toward money. That family ethos is what created Serum’s massive capacity, and, in Poonawalla’s view, it allows the company to move faster and take bigger risks manufacturing in the pandemic than any publicly listed pharmaceutical giant. After all, he can afford it. Have you seen the plane?"

Unlike many public companies with their own institutional inertia and bureaucratic approval processes, family businesses face imminent demise at every turn and must always remain nimble. This was key to the Poonawalla family's rise as a vaccine manufacturing giant. But, in many family businesses, as the seeds of success are sown, the fruits of labor are often split over multiple generations and the challenges of transition become evident.  This brings us to the difficulties that follow successful family businesses. 

2) Family businesses typically have generational challenges as the family grows larger and the spoils are split in numerous, complicated ways:

"But his descendants had large families, which divided inheritances. By the time what was left of the fortune made it to Soli, Adar’s grandfather, all he got was a house and 40 acres of undeveloped land. Soli used that spread to create the Poonawalla Stud Farms, which would eventually become the country’s most successful breeder of racehorses. But the sport of kings had an uncertain future in newly independent, officially socialist India, and as he came of age, Soli’s son Cyrus figured it would be wise to diversify into a business with more mass-market potential."

At Permanent Equity, we specialize in helping family businesses transition ownership and operations from one generation to the next while allowing the family to continue doing what they do best - operate. With backing from a permanent source of capital, family businesses can afford to take risks they may not otherwise take. 

3) Family businesses must thrive off of internally generated cashflow, and are thus resource constrained unless they raise outside capital. Therefore, making big bets comes with a larger risk of failure:

"The Oxford team published promising data in a July article in the Lancet, showing its vaccine produced an immune response in almost everyone who received it in early tests. But it still has a long way to go before its safety and efficacy are proved in large-scale human trials, which are now under way. If the vaccine fails to prevent disease or turns out to have unacceptable side effects, Serum’s preparations will have been for nothing. That would incur a loss the company estimates could be as high as $200 million—though the Bill & Melinda Gates Foundation has agreed to help share some of the production risk, and Serum hopes to repurpose its new equipment for other coronavirus vaccines."

At Permanent Equity, we stand ready to help you continue to operate your family business with the help of our strong balance sheet and our willingness to take intelligent risks. If we can be of service to your family in any way, please do not hesitate to reach out. 

My life pouring concrete (Quillette)

+ While slightly racy, this piece covers what the world of hard, blue collar labor is like from the perspective of an insider. Worth the read, especially if your 'shoes and shirt are clean.'

"To the extent construction workers are discussed at all in the media or popular culture, it’s usually by reference to stereotypically negative attributes, such as sexist leering, foul language, and substance abuse. Unless you are embedded in this world, you’ll miss the offsetting positive aspects, including the unspoken code that exists among most crews: (1) Do the best work you can, without creating more work for others; (2) don’t shirk the dirtiest or hardest task; (3) obey your direct boss, but remain suspicious of authority more generally, especially when it walks on to the site with clean hands and nice shoes. (Young engineers tend to be particular objects of scorn); (4) never rat. If someone’s alcohol or drug problem is out of hand, let the supervisor address it. If your colleague gets fired because you blew the whistle, you may lose something more precious than a job."

Thousands of small businesses are dying and no one is tracking them (Bloomberg)

+ "Yelp Inc., the online reviewer, has data showing more than 80,000 permanently shuttered from March 1 to July 25. About 60,000 were local businesses, or firms with fewer than five locations. About 800 small businesses did indeed file for Chapter 11 bankruptcy from mid-February to July 31, according to the American Bankruptcy Institute, and the trade group expects the 2020 total could be up 36% from last year. While the businesses are small individually, the collective impact of their failures could be substantial. Firms with fewer than 500 employees account for about 44% of U.S. economic activity, according to a U.S. Small Business Administration report, and they employ almost half of all American workers." 

The world’s best hope for enough covid-19 vaccine comes from India (Bloomberg)

+ "Serum already has a deal to produce a billion doses of ChAdOx1 nCoV-19, the vaccine being developed by the University of Oxford and AstraZeneca Plc, which could win approval from U.S. and European regulators as soon as this autumn. But Poonawalla argues that whichever of the more than 100 vaccine candidates in development ends up being effective, Serum will have to be part of any global-scale manufacturing plan, and not just because of the size of its factories. The only shareholder Poonawalla has to answer to is his 79-year-old father, Cyrus—one of India’s best-known bon vivants in his day and the man he credits for his own liberal attitudes toward money. That family ethos is what created Serum’s massive capacity, and, in Poonawalla’s view, it allows the company to move faster and take bigger risks manufacturing in the pandemic than any publicly listed pharmaceutical giant. After all, he can afford it. Have you seen the plane?"

Sweatpants forever: the unraveling of the fashion industry (New York Times)

+ "Inspired by a French children’s film, Entireworld’s sweatsuits come in a prism of cheery colors and, in Sternberg’s vision, “sort of make you look like a cross between a Teletubbie, Ben Stiller in ‘The Royal Tenenbaums,’ and a J.C. Penney ad from 1979.” It wasn’t long before Sternberg’s employees began texting him happy-face emoji. On an average day, the brand — still in its nascent stage — sells 46 sweats. That day they sold more than 1,000. When they ran out of sweatsuits, shoppers moved through the T-shirts, socks and underwear. By month’s end, the brand’s sales were up 662 percent over March the previous year."

Meet the woman who got Joe Rogan and Michelle Obama to Spotify (Wall Street Journal)

+ "Podcasts need to become a big moneymaker if the nearly $50 billion company is to become profitable. It is Ms. Ostroff’s job as chief content officer to make Spotify less reliant on music, and the company has committed hundreds of millions of dollars to make it happen. She has helped position Spotify as a major player—and sparked an arms race for podcasting companies and talent—with deals for Gimlet Media, Anchor FM, Parcast Studios and Bill Simmons’s the Ringer. The streaming company now has more than 1.5 million podcasts on its platform, up from 185,000 in 2018."

Remote work is here to stay. Bosses better adjust. (Wall Street Journal)

+ "Every boss of a newly remote team whom I know admits that, like this vice president, they’ve been pushing themselves and their teams harder. A study conducted by one 350-person team at Microsoft Corp. found that in the four months after the team moved to remote work in March, employees worked an average of four more hours a week, attended more (albeit shorter) meetings, and spent about 10% more time in meetings. Fragmented “Swiss cheese” days became common as people struggled to care for and teach their children, and to meet other personal obligations. A “night shift” emerged: Employees sent 52% more instant messages between 6 p.m. and midnight. They worked more hours on weekends."

How China controlled the coronavirus (The New Yorker)

+ "The Chinese lockdown was more intense than almost anywhere else in the world. Neighborhood committees, the most grassroots level of Communist Party organization, enforced the rules, and in many places they limited households to sending one individual outside every two or three days to buy necessities. If a family were suspected of exposure to the virus, it wasn’t unheard-of for their door to be sealed shut while tests and contact-tracing were being conducted. One student I had taught in the nineties sent a photograph of a door in her community that had been closed with two official stamps."

We'd love your help.

If you stumble across something great, send it to weekly@permanentequity.com.

If you know an owner, operator, or someone who works with SMB's, please give us the highest compliment and send them our way. You can find previous The Weekly issues here.