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David has been writing and publishing since 2006.  

This post was written and published prior to September 2023 when David and his prior firm, Family Capital Strategy, merged with Greycourt.  Views expressed reflected David’s personal views at the time and do not necessarily reflect the views of Greycourt.  Posts and information may be out of date and should not be relied upon for investment advice.

Entrepreneur vs. World – The Atrophy of Family Wealth – Part 3

Feb 11, 2021 | Family Wealth

Photo by Siddhant Kumar on Unsplash

This week we wrap up our three-part consideration about the atrophy of family wealth.  In Parts 1 and 2, we have worked to deconstruct the shirtsleeves-to-shirtsleeves proverb by considering how each generation contributes to the ultimate outcome.   For G3, we looked at the dynamic of spending and the impact of continuing a lifestyle seen in prior generations without the ability to add to the wealth of the family.  For G2, we looked at sibling rivalry – not a most public break-down in relations, but a more pernicious sort, where the sibling generation emotionally distances itself from each other and the business.  The net impact being, that G3 is raised in an environment where the continuance of the family is not seen to be something of importance.  We conclude this week by look at the first generation.

A common take on the first generation would be how their need to be in control hinders future generations from developing as individuals or as leaders within the business.  Anyone with any familiarity of family business, or even a casual fan of HBO’s Succession, is likely familiar with this dynamic.   Today, I would like to dive further into the attitudes and behaviors of G1 and ask why this need to be in control is so common in the first place.

In 2018, two professors, Deepak Hegde and Justin Tumlinson, published one of the most interesting academic papers I have read in years.  Entitled Asymmetric Information and Entrepreneurship, the authors attempt to understand “why do individuals become entrepreneurs?”  The fascinating conclusion that they reach is that any ‘individual has incentive to start his own venture if potential employers perceive his productive capacity as lower than he does.’  The labor market between employers and employees is a cautious dance in which employers want to provide opportunity and responsibility according to the perceived ability of the employer.  After all, the cost of failure can be exceedingly high – either real career risk for the person who made the poor hire or putting the future of the business in jeopardy.

The point this paper makes is that there are a group of people whose ability levels (whether actual or self-perceived), somehow do not align with the most common signs of these abilities in the labor market (think prestigious universities, prior top-tier employers etc.).  For this group, entrepreneurship becomes the most direct path by which the actual abilities of the employee can demonstrated and rewarded.

“Despite my privileged upbringing, I’m actually quite balanced… I have a chip on both shoulders.”

Russell Crowe as John Nash in A Beautiful Mind

This study offers an important insight into the psyche of G1 in a family system.  For many of these wealth creators, there is an innate sense of them against the world in their efforts to establish and grow their business.   Because of this, the business most commonly becomes inextricably intertwined with the identity of the entrepreneur.   Or as a 1971 article in the Harvard Business Review (Conflicts That Plague Family Businesses) explained it, “An entrepreneur’s business is simultaneously his ‘baby’ and his ‘mistress.”   At the bottom line, there is a tremendous amount of emotional energy that the founder has contributed to the business itself. 

So, as we consider how shirtsleeves to shirtsleeves progresses, the seeming inseparability of G1 from the business (whatever it may be) manifests in the most often referenced succession related challenges.   Importantly, succession planning is the symptom, not the cause of this inter-generational challenge.  The underlying cause is the more central identity question of who is the entrepreneur if they are no longer in charge of the business? 

Rather than pass through the dark night of the soul to answer that core question, the natural temptation is to keep things as they are – meaning a leader that stays past their prime.   If leadership were to change and the business fails, the entrepreneur carries the double burden of seeing his business legacy disappear, as well as the guilt of having made the wrong choice in successor. 

If leadership changes and the business sees tremendous success, while the guilt of having made the wrong choice is not present, the leader is confronted with the reality that they were perhaps not as great a leader as they imagined – that they were the ‘lid’ holding the firm back.  So instead, the easiest choice is no choice at all – even if that has as much risk – potentially harming the business in both the short and the long term.

G1’s common contribution then to the atrophy of family wealth is then an inability to see their own identity evolve beyond that of the entrepreneur who need to prove to the world what he/she was actually capable.  While that may provide the needed dynamic to bring a new venture to life, the late career quest for the founding generation, is to do a harder, more uncertain work to expand their own personal conception of identity.


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