Characteristics

Although it is simplest to conceive of a new business venture as emerging from scratch out of the ideas and energy of a single entrepreneur, that is not the typical story. Most businesses are started as part of a process that includes many smaller efforts, some successes and some failures, from which the founder learns what he or she needs to know. Other people contribute ideas, capital, or encouragement. The story of George Pilgrim and Agricultural Publishers, Inc., captures this “accumulated learning” idea of the founding of a family business.

Agricultural Publishers, Inc.

George Pilgrim was born in 1917 and raised along with his younger sister in towns in Indiana and Illinois. His father was a successful industrial designer and mechanical engineer (as well as a political cartoonist for the local paper), whose inventions included, among other things, putting lightbulbs inside refrigerators. George found in his father a model of independence, successful entrepreneurship, and close involvement with family. He admired his father a great deal, and they achieved a kind of colleagueship, which was very important to George’s success at several key points in his career.

As a child, George developed an interest in poultry agriculture. His father was ready to acknowledge that George had not inherited his mechanical aptitude or interests, but no one could understand the fascination with farming. George raised pigeons, the closest thing he could find to chickens in a city. “I called it the Healthy Pigeon farm, and every pigeon was named for a famous cartoon character. Obviously, I wasn’t too sophisticated about life in those days because Moon Mullins and Dick Tracy were some of my best egg layers.” George was a reasonably good student and an excellent athlete—also strongly encouraged by his athlete father. He was competitive and “didn’t see any reason to come in second” once he started something. He had a good sense of humor and was known for his practical jokes, which usually stopped short of getting him in trouble.

George attended the University of Wisconsin. He began as a major in poultry husbandry, then shifted to agronomy. Hybrid corn was just beginning to make its mark, and George saw that bigger opportunities lay in improved strains and new seeds, not poultry. He gradually modified his boyhood vision of creating a large-scale egg operation into a more general interest in farming. George’s father, anxious to move his design studio out of the city and interested in supporting George’s enthusiasm for farming as a commercial enterprise, bought a farm in northern Illinois and hired a manager to operate it. When he began to confess that he did not see the attractions of farming over mechanical engineering (“This whole operation would make a lot more sense if you could do it indoors,” he told George), his son decided he should leave college after his junior year to assume management of the farm.

The farm was diversified, giving George experience with poultry, grain and feed crops, dairy cows, and even sheep. George wanted to make the farm a financial success as soon as possible so that he could marry his college sweetheart, Dorothy. “She was a city girl, so whenever I called back to her at school and described the farm, I emphasized the long afternoons riding our horses. I didn’t talk as much about the dairy cows.” Dorothy and George were married in June 1940. From the beginning, they were “a farm couple.” There was only one hired hand. Dorothy kept all the books, drove the trucks, and did whatever else was needed. George had the 200 sheep sheared and the wool sent to Ohio to be made into virgin wool blankets; Dorothy sold the blankets at country fairs and craft shows.

George’s and Dorothy’s talents and the welcoming economy at the start of World War II led to steady growth. Primary annual financing came from the Production Credit Association, an agricultural financing agency with a nationwide network of county-based offices. At first George could not sell much seed for cash, so he bartered it for other grains and feeds, machine parts, and agricultural supplies—which conserved his own cash. Gradually, as a cash market developed for various seed varieties, George began to contract with other farmers for their acreage to produce seed, which he sold in a continually increasing geographic market. At its peak, George’s farm of 450 acres was augmented with contracts for over 10,000 acres, and he was selling seed all over the United States, primarily in the East. They also operated a grain elevator, for which Dorothy did the accounting until their sons, David and Jon, were born in 1942 and 1944.

The next entrepreneurial leap was a contract to grow certified seed from the foundation seed of a new barley being developed at the University of Illinois College of Agriculture. This seed was rationed according to the number of acres of certified seed that farmers had produced in the prior two years. George was able to get enough foundation seed to plant about 40 acres—at that time the largest share in the country, but only marginally profitable. Instead of waiting for spring to plant his allocation, George leased land in California’s Imperial Valley and took a chance by planting in October, hoping to have a much-expanded crop of seed to plant the following spring in the Midwest. Everything went wrong. The irrigation water had wild oats in it, which had to be removed by hand after they sprouted. In the much longer winter growing period before the seeds matured, the barley grew seven feet high instead of four; the combines were not equipped to harvest such excessive straw. Once the seeds were harvested, there was no time for a conventional winter dormancy period. George had to rely on the commercially untested theory that the trip back to the Midwest in a refrigerated truck would suffice. Each problem was solved in time. The original thirty-six-bushel allocation was multiplied to enough seed for 4,000 acres of spring planting. His confidence had been so high that he had not only precontracted for the 4,000 midwestern acres before planting the California experiment, he had even presold the following year’s crop from all 4,000 acres to Cargill. After a second year of similar success with a new variety of oats, the other certified seed growers cried “foul” and pressured the University of Illinois to withdraw their permission for George to use their foundation seed that way for another season. George looked for another opportunity.

He used the seed profits to buy a grain processing plant in Racine, Wisconsin, and began to manufacture and market oatmeal at retail as Pilgrim Oats. This effort was as much a disaster as the seed business had been a success. George realized he had been incredibly naive to attempt to compete with a giant like Quaker, which controlled shelf space in the retail markets. He had counted on export sales but found the international regulations, duties, and currency exchange eating up all his profits. His only redeeming experience from the oatmeal business was Dorothy’s idea about what to do with a train car full of unused, brightly painted metal oatmeal containers that were intended for export use. They invented a game, which they called Holi Boli, using ten of the cylinders held together in a triangular box, and a shipment of red and white Ping-Pong balls that George had bought from another failed entrepreneur. George took his sample product to the home office of a department store chain in Racine and convinced the managers to buy all of them—several thousand games. “That helped get us out of the hole and salvage something,” George says. “But I’m sure it was a little confusing when, somewhere in the Midwest, the day after Christmas that year, some kid accidently broke open the triangular box and found himself surrounded by metal cans with a Pilgrim hat painted on them and directions for making oatmeal in eight languages.”

David and Jon, now in junior high school, had their first real jobs in the family business at this stage. They were responsible for putting the cans into the Holi Boli boxes. They also had to open thousands of unsold, prepackaged cardboard containers of oatmeal and put the contents back into 100-pound bags for resale overseas. “They were on their own paths. Their jobs were to take school seriously, do sports, find out what they wanted to do. I remember David leaning over to Jon after a day of emptying those oatmeal cartons and saying in a well-reasoned voice, ‘Something must have gone really wrong here.’ I remember thinking he had a pretty good business head on his shoulders.”

“It’s hard to think of any way to put a good spin on the oatmeal experience,” George remembers. He converted the now-inoperative facility into a commercial grain elevator, which Dorothy managed until George hired a general manager who eventually purchased the facility. Meanwhile, George pursued his new idea. His experience with the Production Credit Association (which accounted for over 30 percent of all short- and intermediate-term credit to agriculture) convinced him that there was a need, and a market, for a good-quality magazine covering the business concerns of farmers. “Farming was becoming capital intensive. Farmers needed to know more about pushing a pencil than about operating a tractor. As it was, the only publications were very general. A melon farmer in South Carolina could read about sheep ranching in Wyoming, but hardly anything about the financial side of running his business.” George went on the road to recruit individual offices of the PCA to subscribe to a new magazine that he intended to publish. At that time he met two experienced publishers who were ready to leave the companies they worked for, which put out established magazines on country life, and to join in a new venture. George put in what he had salvaged from the oatmeal business, and they formed a three-way partnership. The two partners concentrated on sponsored farm publications for corporate clients such as Ford Motor Company and Massey-Ferguson. George traveled to individual PCAs trying to sell the magazine concept.

“I made my first sales call on a PCA office in April 1957. We put out our first issue that fall, with twenty-three offices signed on and a circulation of 35,000.” George’s new idea was to have a shell of national business news, with a core of local news and advertisements generated by that particular association (typically serving five counties). George actually traveled to every individual PCA in the United States. Even though the idea caught on immediately and new association offices were signing on every day, George’s two partners thought it was too complicated to continue. Printers were not friendly to so many different versions of the same magazine; the concept of regional editions, let alone local versions, was not yet accepted. They worked out an amicable separation, with George intending to develop the local news and advertising as a newsletter service, and the partners keeping the general magazine part.

Within three months, the newsletter had grown to the phenomenal size of 300,000 circulation. When the former partners approached George about buying the original farm magazine back from them, George knew he should make the deal to keep them from evolving into competitors, even though the asking price was exorbitant. To raise the capital, George made a deal with an Iowa agricultural company to set up a new company, Farm Credit Services, Inc., half owned by them and half by George. George would have complete control; Farm Credit would in effect be silent financial partners. Once he had the magazine back, its growth exploded. Within a year, annual sales had reached $3 million. In only a few years, he built circulation to 600,000, representing 94 percent of all the Farm Credit Associations nationwide. Through the various buyouts and restructurings that have occurred since them, the agricultural publishing business has been the heart of George’s work for almost forty years.

Ownership Issues

The ownership of a first-generation Controlling Owner business is in the hands of the founder (sometimes shared with a spouse or a minority partner). The founder’s ownership control allows control over strategic and operational decisions and often gives control over family decisions as well. George Pilgrim had experience with a number of ownership combinations. At first he developed a farm that was actually owned by his father. This is especially common on family farms, where ownership characteristically does not change hands until the death of the senior generation, but operational control may be passed down to the next generation much earlier. In the grain and oatmeal businesses, George was the controlling owner. His experience with nonfamily owner partners in Agricultural Publishers lasted only five years. Although in the end he had built a business that required more capital than he could generate himself, he was able to structure a deal with a new nonfamily financial partner that gave him the capital he needed while leaving him with complete operational control.

As discussed in chapter 2’s introduction of the “marriage enterprise” concept, the role of the spouse in the Start-Up stage may be that of a silent and supportive partner, or of a copreneur. Working in the business together does not necessarily make the business copreneurial. Only if both spouses have significant management authority and feel empowered to make decisions is the business truly copreneurial. These equal partnerships are becoming more common in family businesses, but they are still the exception. More commonly, the spouse is an owner in name only, especially if some of the start-up capital came from the spouse’s personal funds or extended family. In those cases, it is very important for there to be an explicit agreement on the spouse’s appropriate role. A spouse will occasionally serve as an adviser to the founder and even comment on operational issues, but the couple’s division of responsibilities makes it clear that the business is in the founder’s domain. The Pilgrims had that kind of arrangement. Dorothy was as influential in the family as was her husband and was also an important business adviser to George, in addition to being a key manager at times, but he was the business leader. Their marriage enterprise involved them both in the business and the family, and they made a good team.

In other cases, the understanding may not be as clear. Some spouses can confuse their shareholding with management authority in the business and may attempt to make decisions or direct employees. This confusion of management and ownership responsibility or authority can lead to friction within the marriage and the company.

At the Young Business Family stage, the children are typically too young to be involved in ownership in any significant way. The only reasons for the controlling owner to put shares in the name of children would be for symbolic or tax purposes. Minority shares held by the founder’s children are not likely to have much effect until late in the Young Business Family stage. But at that point, the passing of even token ownership to the children can signify a coming of age for the younger generation and their parents’ conferring of trust. Then, if young adolescent children are made aware of their ownership, it may increase their interest in the company and engender a greater sense of responsibility.

Finally, the impact of nonfamily shareholders in these founder-centered companies varies greatly. In this variation on the classic Controlling Owner stage, there is always the potential for conflict if owners with small or token shareholdings try to exercise too much (in some cases, any) influence on the early development of the company. There are entrepreneurs with a collaborative style, who welcome input and gladly share control, but they are in the minority. Most founders want to see minority shareholders as loyal—and silent—investors. These feel gratitude for the financial support and for the confidence and optimism that it represents, but they expect the investors to step back and let the founder create an enterprise that will benefit them all. When the investors can no longer go along with the founder’s clear vision, as in Agricultural Publishers, then it is time to dissolve the arrangement.

Family Issues

Many of the family issues that are most important in Start-Up, Controlling Owner businesses were discussed in chapter 2. The nature of the marriage enterprise, the disengaged or enmeshed style of the family, the distribution of authority between the spouses, and the relationships with the extended families are all variables that shape this type of family business. The place of work in the lives of founders is particularly important. Within the founder’s family in general, the owner-manager is very often at this stage an absentee parent. This absentee role can cause the children to feel resentment toward the business, as if it were a powerful sibling competitor. These feelings of rivalry can, in fact, discourage children from having anything to do with the company in the future.

In addition, the tensions of the Start-Up stage can easily affect moods and anxiety level of the parents in the business. If it is the founder’s style to bring home the frustrations and problems of the firm, then the children’s early impressions of the family business may be negative. If the founder decides not to share anything about work with the family, the children and spouse can feel excluded from the most compelling part of that parent’s life. Although this was a very busy and stressful time in George Pilgrim’s career, his sons remember their father as upbeat and confident. George and Dorothy were open with their sons about the problems the business was having, but also confident that the problems would be overcome.

On the other hand, some founders experience such a high degree of satisfaction and accomplishment from the role of controlling owner that it invigorates their role in the family. In these cases, the family can be invited in as participants in the drama of the Start-Up business. The pioneering or adventurous aspects of the founder role can lead young children to create a mythical image of the parent that is part cowboy, part pirate, and part king or queen. If children are allowed to come to the workplace and become familiar with it, they sometimes see it as a natural extension of the home. This may lead to a much greater chance that the younger generation will seriously consider careers in the company when the family matures into the next stage, Entering the Business.

George Pilgrim was unusual in his skill at balancing the intense demands of his various entrepreneurial ventures with a high-involvement definition of parenting. During the farm and seed days, he had the benefit of working and living in the same place. Farming is one of the few family enterprises that carries some of the lifestyle of preindustrial families, where the children are observers of all aspects of the parents’ work. When George began the publishing business, all that changed abruptly. He was on the road, eventually coast to coast, selling his new product. He states that however much he traveled, he always insisted on being home by Friday night and would not leave again until Monday. David and Jon also remember their father driving all night to make it home for a Little League game or a special event. Even so, the business’s demand put some strain on the family system; they were used to having him around all the time.

Business Issues

At this early stage in the business, the owner-manager must work to establish with customers that the company has something valuable to sell. Sometimes this is relatively easy, but rarely do we see a “better mousetrap” phenomenon, where the product is so clearly desirable that the customers beat a path to the start-up’s door. As the owner-manager builds capacity to produce or provide service, with little secure revenues, the management of cash flow is critical. As in the WISCO case (chapter 1), even if there is enough investment capital to begin to produce and market the product, business survival is very much in doubt until there is a stable revenue stream that more than covers operating costs. The energy required to pull off this early business development effort is generally astounding. For several years, most of the owner-manager’s waking hours are spent managing the business to the point where there is a reliable cash surplus at the end of each pay period.

In the Start-Up stage, the controlling owner as a business leader must work very hard to establish loyalty among customers, employees, and other key stakeholders, such as the family, the bank, and suppliers. A loyal following is typically patched together first by spinning a compelling vision that allows these critical constituencies—especially employees—to believe that the company has a chance to survive and prosper, and therefore that it is worth their efforts. The founder may have to cut special deals with key players in order to secure their commitment. Financial institutions may need extraordinary loan guarantees. Nonfamily candidates for key managerial positions may negotiate special benefits or incentives to leave secure jobs and take a chance with the new venture. Potential major customers may demand price considerations; unethical purchasing agents may ask for kickbacks. Family members and others may be offered influence in return for investment. These deals are most often secret and nonuniform. Although expedient in the short run, they also become part of the founder’s legacy that may complicate the introduction of management systems into the business as it progresses to the next stages in business and ownership.

Founder controlling owners in our experience often do not choose an organizational structure that encourages teamwork among the key players in the company, often preferring to foster close relationships with the top managers individually. They feel most comfortable with the business in a hub and spokes organizational structure, in which the owner-manager, at the center of the wheel, is necessary for all key decisions and is an intermediary in all communication. This hub-and-spokes design—with information flowing in and decisions flowing out—can generate a highly innovative, customer-responsive culture. It can be successful as long as the organization does not get too large and the owner-manager remains physically and mentally vital, in touch with the market, and fully competent in the company’s technology. If these conditions are not met, the hub-and-spokes design can inhibit company growth and profitability. Because of the fluid and centralized nature of this organization design, all eyes tend to look to the owner-manager for direction. His or her vision drives priorities and activities, and his or her behavior drives company decisions and values.¹⁰

None of George Pilgrim’s businesses except the magazine got very large or had many full-time staff. Still, George definitely involved himself with every aspect of each business, down to the smallest detail. He was the primary salesman, product designer, production manager, marketing expert, and financier. Dorothy handled accounting whenever possible. He always felt that he knew what would work, even if it was a tough sell to others. When printers fought with his idea to put different advertising sections in each of four county editions for each of the 400 credit association districts, George kept shopping until he found shops that would just do what he wanted. “I didn’t understand the technology of printing, and I didn’t care. I knew what the market needed, and I was right.”

In the Controlling Owner—Start-Up business, the two most important requirements for the business’s survival are that it flexibly responds to customer needs and remains very cost-efficient. The owner-manager must select adequately skilled employees who can take direction, find financing for investment and operating capital, carefully manage cash flow, and budget for various company projects. In this early period of business life, the business must be able to adjust quickly to growth opportunities and cutbacks. Upturns and downturns can be dramatic and unpredictable for these smaller companies, and they must learn how to meet expanding or declining orders for what they sell.

The personally involved style of most founders can work well in creating an initial customer base. George Pilgrim wanted to know every branch manager in the Production Credit Association, and he worked hard at creating a personal relationship with each of them. He was on the road selling the idea so that he could talk to the association directors face to face. In the car after each meeting, he made notes for a card file, so that when he came back through the same territory six months later, he could ask the right questions and renew the conversation. He knew that his main selling advantage was himself—an experienced, knowledgeable farmer, not an advertising or publishing man from the city. The personal loyalties of customers are often what primes the initial cash pump of the new venture. It is also true that these individual connections to the founder have to be modifiable, and eventually transferable to the company itself, if the business is to make the transition into the next stage of Expansion/Formalization.

Policies and procedures within the Start-Up-Controlling Owner organization are typically not formalized. This lack of routine and controls can work in support of flexibility if employees are of good quality and empowered to act independently within the limitations of overall company goals and values, and if communication is good enough for the company to learn quickly and continually adjust. However, more often the vagueness of authority, policies, and even direction of the company can implicitly make employees even more reliant on the owner-manager, keeping him or her in the center of the company. Lack of operating systems can also indicate weak management skills of this individual. These companies demonstrate limited delegation to others, a poorly skilled group of other managers, and authoritarian decision making by owner-managers.

In summary, the Start-Up stage is a time when the foundation is laid for three core aspects of the family business: company culture, strategy, and asset management values. A company’s culture (like the culture of any social group) is its strongly held values and assumptions about correct behavior in a number of areas: proper decision-making authority (hierarchical, collateral, or individual), the role of management, ideal leadership style (autocratic, consultative, participatory), norms of openness versus secrecy, people versus task orientation, loyalty to the leader versus loyalty to the organization, respect for management hierarchy and structure, the role of the family in the business, and the time orientation of the company (focused more on the past, the present, or the future). These values and assumptions are identified through visible cultural “artifacts,” including myths and stories about the founder, dress codes and physical features of the company, the written philosophy of the organization, and traditions in the company and the family. The founder also symbolizes or directly articulates, through words and behavior, these underlying values and basic beliefs. They become ingrained in the company, because it is part of the founder mythology that the early success of the organization depended on them.¹¹ Company cultures can endure for a long time without major changes when there are reliable methods for faithfully transmitting their essence. That is certainly the case in family firms; the family is perhaps the most reliable of all social structures for transmitting cultural values and practices across generations.

Dyer observed four kinds of cultures in family companies. The most common form, paternalistic, is characterized by hierarchical relationships and centralized authority. The leaders, usually family members, make all significant decisions and closely supervise employees. The second pattern, laissez-faire, is similar to the paternalistic culture, but employees are instead seen as trustworthy and are allowed to make some decisions. The family still determines what needs to be done, and the employees decide how to accomplish it. The participative culture, a rare form in family companies, is radically different. It is group oriented, structured to involve others, downplays the power of the family, and encourages the growth and development of employees. Dyer labels the final cultural pattern professional, a form usually found in firms being run by outside professional managers. It is characterized by individualism, competition, and impersonal employee relations.¹²

The founder also has a strong influence on the enduring strategy of the company.¹³ There is often in family business a strong and sometimes irrational loyalty to the original business or businesses started by the founder. The founder may convince his family and managers that success depends on being in a certain line of business or running that business in a certain way. When, in later generations, the value of the original business is questioned or there is a drive to sell or diminish the business, some family members may see this as an affront to the original founder and may fight to maintain these original operations. Beliefs about growth, diversification, debt, ownership control, competitive positioning (in terms of quality, price, service, and so on) can all be heavily influenced by the founders’ original tenets about smart business practices. The founder may also have strong loyalties to the community in which the business originated and to the original customers or markets served by the company. Finally, the founder generally has a philosophy about the extent to which the company is to serve the needs of the family. All of these original philosophies can have important influences on the current strategy of a family company. These philosophies can be functional or dysfunctional in the current business environment.

Third, founders can affect for generations a family’s shareholder asset management values and related practices. A family’s orientation toward preservation versus consumption of business capital and family wealth is generally initiated by the founder in the first generation of the business. Shareholder loyalty to established businesses, interest in entrepreneurship and new ventures, the commitment of ownership to family and nonfamily management, the separation of shareholder and management roles, the responsibility of the business to shareholder needs, and the management of information to and involvement of shareholders are all initiated by the actions and attitudes of the founder. All of these practices in turn greatly influence how shareholders are treated, how they treat the business and its capital, and the ultimate harmony of the family in the company.