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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  Posts and information may be out of date and should not be relied upon for investment advice.

Don’t Worry About Three Generations, Maybe Gen 6 is the Riskiest

Jul 8, 2022 | Family Wealth

scenic view of rice paddy
Photo by Pixabay on Pexels.com

Oh emperor, my wishes are simple. I only wish for this. Give me one grain of rice for the first square of the chessboard, two grains for the next square, four for the next, eight for the next and so on for all 64 squares, with each square having double the number of grains as the square before.

 – Metaphorical story

While families may be busy with any different activities, the common character of them all is investment.   Whether in multiple domains such as financial markets or philanthropy, the goal remains the same – the use of present resources to create and grow something that will deliver future value.   

This seeming mandate to create growth exists across all of life.  

And yet, with several thousand years of human history, we have certainly seen growth.  But simultaneously, we do not see any massive organizations or societies that have grown ad infinitum.  Instead, there appear to be natural limiters to growth that occur in all sorts of various domains.  

This makes sense, as growth requires further and further increases in complexity.  While complexity can enable many things, it is always a tenuous situation.  The Jenga tower can be built to a wide range of complex forms, but it is most stable when in laying in separate pieces on the tabletop.  In physics, this is known as the law of entropy.  

Today, I would like to explore what limits to growth might look like for a family.  Or said differently, is there a natural end point to a family enterprise?  First, I’d like to acknowledge that there are many exceptionally old family enterprises in existence.  

But for many of these families/businesses, there has remained an exceptionally concentrated ownership base with ownership / control passing from one generation to a single heir per generation.  

Our consideration today are family businesses / enterprises with widely dispersed ownership groups. For example, consider Du Pont family which Forbes estimates that there are 4,000 heirs with wealth of $16bn.   While there may be other examples of exceptionally large groups of family heirs, the number is quite small.  This limited sample set is in fact due to the limitation of time itself.

If we assume the industrial revolution is the first catalyst for the creation of large, family fortunes outside of earlier feudal / land-based systems of wealth accumulation which required a single heir, we only have around 200 years of possible history.  If a family generation spaces every 25 years, there are only 8 generations between today and the early 1800s.

Said differently, starting with a single ancestral family unit, after 8 generations, you are likely to have around 250 lineal descendants, assuming 2.2 children per generation.  That rate is high for today’s standards but low for the 1800s where families were larger, and women likelier to have a larger number of births over the lives.

GenerationLinealW/ SpouseLiving at any time

If you include spouses and assume ~3 generations are living and active at any given time, you can see that you still need 6-7 generations to approach a couple of hundred individuals.

So, again our sample size remains small with only a likely handful of families that have endured long-enough to approach these figures.  But as mentioned earlier, this piece is meant to explore the theoretical limits to growth a family might encounter.  

And to do so, we need to discuss a concept known as Dunbar’s number.  British anthropologist Robin Dunbar postulated that “there was a ratio between brain sizes and group sizes through his studies of non-human primates.”    When Dunbar and his team applied this analysis to human communities, they found an exceptionally common figure of around 150.  What they found was that for a vast number of types of human groups – at around 150 you see groups begin to either split or collapse.  More here in a fascinating BBC article.

So, for a legacy focused family, the family begins to approach this figure around Gen 6 and certainly by Gen 7.  

What does this mean?  

Arguably there must be a meaningful inflection around this time in how the family organizes and manages it affairs.  The family will simply have become too large for people to maintain relationships on their own.  It will not be possible to have relationships across the entire family base.

When a company scales up its employee base, it begins to break into functional departments and teams overseen by a hierarchy of Vice Presidents (who may retain operating authority over a business unit) and Directors who retain execution authority over a specific functional task.  Or when churches grow, they might start Sunday Schools or small group ministries to help with this dynamic.

For families the question is what is the analogous structure that should emerge?  It is generally regarded that retaining an organizational structure tied to branches based of G2 siblings does not age well.  You could postulate geography, age group, or even some sort of shared affinity as potential constructs that allow relational connectedness in a large group of people.

I recognize this may not necessarily be a ‘live’ concern for many families today.   Yet, there are a growing number of families with large ownership bases that are right around the century mark (~gens 4-5).  As Andy Grove remarked that only the paranoid survive, it is important for these older families to put this dynamic on their radar screen, as issues of size will present long before things begin to ‘break.’


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