Families are often an invisible force behind entrepreneurs, providing workspace, labor, or initial funding. According to the Global Entrepreneurship Monitor’s 2019/2020 Family Entrepreneurship Report, about 75% of entrepreneurs worldwide co-own or co-manage their businesses with family members. In the U.S., according to Gusto, nearly half of small businesses employ family members, and more than one in five hire a family member as their first employee. Yet despite this widespread support, its impact remains hard to measure.
In a recent article published in Strategic Management Journal, Shon Hiatt, associate professor of business administration at USC Marshall and his co-authors, Ryan Coles, assistant professor from the University of Connecticut; Grady Raines, a PhD candidate from Cornell University; and Wesley Sine, a professor from Cornell University, studied Jordanian startups with rare data on initial funding sources, including family funding.
To identify the consequences of family funding, the authors used the sudden settlement of Syrian refugees as a natural experiment. Beginning in 2011, millions of Syrians fled civil war and crossed into Jordan. Many Jordanian families have cross-border kinship ties, and the influx of refugees intensified obligations to clan members in some regions more than others.
The results? In highly exposed regions, family-funded firms were more likely to fail after the refugee influx as family obligations increased, while bank-funded firms were less likely to fail because the refugees provided low-cost labor supply and increased customer demand for their products and services. Pre-crisis trends were parallel; divergence appeared only in the most exposed areas after the refugees settled.
The study illustrates that the source of an entrepreneur’s initial funding can shape their venture’s future performance and survival when social conditions change. The authors argue that family funding can be a double-edged sword: it can provide important early support for firms — often the only support an entrepreneur can find — but also embeds firms in family obligations that may constrain them when shocks arise.
Taken together, Hiatt, Coles, Raines, and Sine’s study shows how family social ties, often viewed as an important asset for an entrepreneur and their ventures, can become liabilities when there is social upheaval. Their work shows the importance of understanding not only where venture capital comes from, but also the social meaning attached to it, as these origins can shape entrepreneurial resilience in the face of crisis.
