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Rice University research sheds light on what family office investors are looking for

Family firms aren't investing in research and development — but why? Getty Images

Family firms are publicly traded companies in which family members own at least 20 percent of the voting stock, and at least two board members belong to the family. For obvious reasons, the central principals in these firms tend to have a longer view than principals in non-family firms. Yet family firms invest less in research and development (R&D) in technology firms than their non-family counterparts. Since investments in R&D are stakes in the future, why this disparity?

Robert E. Hoskisson, a management professor at Rice Business, joined several colleagues to answer this question. Refining a sociological theory called the behavioral agency model (BAM), the researchers defined family-firm decisions as "mixed gambles" — that is, decisions that could result in either gains or losses.

Because success in high technology relies so much on innovation, it's especially puzzling when such a family owned business underinvests in R&D. So Hoskisson and his colleagues focused on the paradox of family firms in high tech.

According to previous research, family owners weigh both economic and non-economic factors when making business decisions. Hoskisson and his team labeled these non-economic factors socioemotional wealth (SEW). SEW can include family prestige through identifying with and controlling a business, emotional attachment to the firm or the legacy of a multigenerational link to the firm.

That intangible wealth (SEW) explained some of the families' R&D choices. While investment in R&D may lower future financial risk, it can threaten other resources the family holds dear. Expanded R&D spending, for instance, is linked with competitiveness. At the same time, it is associated with less family control. That's because to invest more in R&D, businesses typically need more external capital and expertise. So when a family firm underinvests in R&D, it may in fact be protecting its socioemotional wealth.

To further understand these dynamics, the researchers looked at three factors that they expected would raise families' R&D spending to levels more like non-family counterparts.

The first factor was corporate governance. As predicted, the researchers found that family firms with a higher percentage of institutional investors invested in R&D at levels more like those of non-family firms. The institutional investors naturally prioritized economic benefits far more than the founding family's legacy wealth (SEW).

The researchers also analyzed corporate strategy. Family firms, they found, invested more in R&D when it might be applied to related products or markets. Even families bent on preserving non-economic wealth could be lured by a big economic payoff, and related business are easier to control because they are closer to the family legacy business expertise.

Finally, Hoskisson and his colleagues looked at performance. When a family firm's performance lagged behind that of competitors, they reasoned, the owners would spend more on R&D. A higher percentage of institutional investors, the team theorized, would magnify this effect. Interestingly, the primary data (from 2004 to 2009) failed to support this hypothesis, while an alternative data set (from 1994 to 2002) confirmed it.

Further research, the investigators wrote, could shed useful light on this puzzle. They also encouraged study of how family firms conduct mergers and acquisitions. After all, while families can seem inscrutable from the outside, most run on some kind of economic system. The currency just includes more than money.

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This story originally ran on Rice Business Wisdom.

Robert E. Hoskisson is the George R. Brown Emeritus Professor of Management at Jones Graduate School of Business at Rice University.

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Building Houston

 
 

Check out this curated list of innovation events in Houston for April. Photo via Getty Images

It's time to look at what's on the agenda for April for Houston innovators — from pitch competitions to networking events.

Here's a roundup of events not to miss this month. Mark your calendars and register accordingly.

Note: This post might be updated to add more events.

April 4 — A.I. Digital and the Future of Energy

In the latest installment of UH Energy's "Critical Issues in Energy" Symposium Series, the speakers will take a deeper dive into the role of A.l. within the energy marketplace, specifically with what is being done with A.I. and what is capable of being done. In addition to this pivotal look at one crucial aspect of the energy transition, attendees will be afforded networking opportunities with speakers and distinguished guests, and food/refreshments will be provided.

The event is Tuesday, April 4, from 5:30 to 7:30 pm, at the University of Houston. Click here to register.

April 5 — Creating & Sustaining Innovation & Entrepreneurship

Join us for a fireside chat discussing the growth of entrepreneurship & a panel on demystifying the patent process.

The event is Wednesday, April 5, from 9 to 11:30 am, at the Ion. Click here to register.

April 5 — HAN Angel Academy

Learn angel investing best practices from Capital Factory co-founder and chairman, Gordon Daugherty in a half-day bootcamp format for accredited investors.

The event is Wednesday, April 5, from 11 am to 4 pm, at Rice University - Shell Auditorium. Click here to register.

April 11 — Future of Health Care

The Greater Houston Partnership's inaugural Future of Health Care event highlights one of the region's major industry sectors driven by world-class institutions and professional talent.

The event is Wednesday, April 11, from 10:30 am to 1:30 pm, at the Royal Sonesta. Click here to register.

April 11 — Idea to Impact: Navigating the Challenges to Commercializing University Discoveries

Amazing discoveries are made in university labs every day, yet most of them never develop into widely accessible commercial products. Why? And what can universities do to change that? As part of Rice University's "Betterment of the World" Scientia Lecture Series, join Rice Business on April 11 at 4 pm virtually or in person (Shell Auditorium, McNair Hall) to hear Yael Hochberg, Professor in Entrepreneurship at the Jones Graduate School of Business, as she discusses the challenges in commercializing university research discoveries.

The event is Wednesday, April 11, from 4 to 5 pm, at Rice University and online. Click here to register.

April 11 — Greentown Houston Climatetech Career Fair 2023

Greentown Labs and ALLY Energy welcomes all professionals, students, and soon-to-be graduates to join us for the Greentown Houston Career Fair, which focuses on connecting professionals directly with Greentown Houston’ network of founders, CEOs, and cutting-edge climatetech startups looking for bright and eager talent.

The event is Tuesday, April 11, from 4:30 to 6:30 pm, at Greentown Houston. Click here to register.

April 15 — Earth Day Clothing Swap Party with Sustainable Fashion & Earth Month HTX

A clothing swap is a fun, alternative solution to thrift shopping or secondhand fashion that allows you to clean out the clothes you no longer wear and in return bring home new additions to your closet - all for free and hosted by Houston startup RESTATEMENT.

The event is Saturday, April 15, from noon to 5 pm, at Patterson Park. Click here to register.

April 17-18 — AI Powered Renewable Energy Workshop

AI Houston Institute of Rice University in partnership with Ion is getting together experts from academia and industry working on the application of artificial intelligence in solving some of the most complex challenges facing the Energy industry as it transitions into alternative sources of energy that are green and sustainable.

The event is Monday, April 17, to Tuesday, April 18, at the Ion. Click here to register.

April 19 — Investor Studio Series: Dream Big Ventures x Ion x Mendoza Ventures

Underrepresented founders face a lot of barriers, including rarely seeing VC dollars. However, Dream Big Ventures and Mendoza Ventures are looking to change those statistics to help diverse founders succeed. Join Dream Big Ventures Founder and CEO Staci LaToison, and Mendoza Ventures Co-Founders Senofer Mendoza and Adrian Mendoza, as they discuss the growth of women and Latinas in Fintech, AI, and Cybersecurity in this fireside chat.

The event is Wednesday, April 19, from 5 to 7 pm, at the Ion. Click here to register.

April 19 — The H. Albert Napier Rice Launch Challenge Championships

Join Liu Idea Lab for Innovation and Entrepreneurship and support Rice University student ventures at the H. Albert Napier Rice Launch Challenge (NRLC) Championships on Wednesday, April 19. Five student finalists will pitch their ventures to compete for the chance to win a share of $100,000 in equity-free funding.

The event is Wednesday, April 19, from 5:30 to 9 pm, at Rice University. Click here to register.

April 20 — Female Founders and Funders

Calling all rockstar female founders and investors in the Houston area. Mark your calendars for this month's Female Founders and Funders meetup. Coffee and breakfast is provided and the event is free to attend.

The event is Thursday, April 20, from 9 to 10 am, at Sesh Coworking. Click here to register.

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