This certainly feels like the age of the startup founder. The cheerleading tech press and massive valuation rounds have built a mystique around startup culture. It seems like exciting new companies are popping up daily, led by founders just a few years out of college (or never having finished school).
The allure of this narrative is obvious: the smartest kids in the room get to hire their friends and build a company with other people’s money. Eventually, they attain unicorn status and sell for a cool billion dollars—fame and fortune await.
However, look past the headlines and you’ll find that hundreds of businesses fail for every one that makes both their investors and founders money. You just don’t hear about them because the startup world is very good at triumphantly celebrating their heroes, and quietly burying their dead.
With the press focused on the millions raised by high-profile startups, many would-be entrepreneurs are becoming convinced that these are the only worthwhile ventures to pursue.
“Lifestyle business” is a term in the startup lexicon that refers to businesses that aren’t a fit for venture capital. It’s sometimes used derogatorily, implying that these businesses are somehow easier to build and less worthwhile. This notion is completely false, as many lifestyle businesses are great companies that can lead to a prosperous and fulfilling life for their founders.
Let’s define lifestyle business as one that’s launched with the goal to allow the principals to lead a great lifestyle. And, let’s define a startup as a company that’s run to provide a return to investors. It’s worth noting that companies that don’t raise venture capital are the vast majority of businesses. Some of these businesses require just as much work as those that are VC-backed, and can become world beaters themselves.
Characteristics of a lifestyle business
If the idea of a business where you maintain control and can lead a quality lifestyle sounds attractive, a lifestyle business may be right for you. Below are the characteristics your company should exhibit in order to be a sustainable lifestyle business.
A clear end goal
The goal for a lifestyle business is to build sustainable revenue streams that are set up to operate on their own. This can be done with many types of business models, but all of them must be able to scale beyond a linear relationship between dollars you earn and hours you work.
For instance, if you’re running a brick-and-mortar store by yourself, you can only stay open as many hours as you’re willing to work. However, move that store online, setup fulfillment services by a third party (e.g. a fulfillment by Amazon business), and hire someone to handle customer service, and you’ve freed up your time immensely while the store sells 24/7.
Minimal hiring
With lifestyle businesses, it’s best to stay as small as possible and only hire to run operations that have been established. Every person that you hire should be freeing up your time in a money-for-time trade that you deem worthwhile.
Remember to factor in costs in addition to salaries like payroll taxes, Social Security, and Medicare. You may end up deciding that it’s better to just do it yourself and enjoy the incremental cash flow.
They own the equity
A key characteristic of lifestyle businesses is that they don’t take significant outside equity funding.
Selling ownership in the business, even minimal amounts to like-minded investors, will mean that you’re responsible to someone else. This means giving up much of the freedom that is the goal of lifestyle businesses.
A better option if you do need capital to grow is to look at alternative forms of debt financing. Debt can be beneficial in these situations because once you pay it off, the relationship ends and you still maintain full control.
If you have personal assets that you’re willing to put up as collateral, banks may be open to considering your loan application. However, banks are conservative creatures and often turn down small businesses and startups. Depending on who you sell to, you can consider other forms of financing that use business accounts receivable as collateral and are repaid when your customers pay their invoices.
Established company culture
It’s a given that you’ll work hard, especially setting up your business. However, your goal should always be to establish systems and operations that will allow you to work less eventually.
Recruiting the right employees and keeping them happy will be its own unique challenge, but can be done. Because a lifestyle business typically doesn’t have the perceived upside of startups or the cash flow to pay big salaries, you’ll need to manage the talent that you can hire carefully.
They have a cash flow positive business model
No long-term cash burning operations allowed with lifestyle businesses. Your company needs to be profitable from a very early stage.
Your unit economics must be positive, which means you must sell your goods or services for more than it costs you to produce, deliver, and market. This may sound obvious, but in the startup world, many businesses operate with negative unit economics in order to drive growth.
Look to build a company with these key characteristics, and you’ll be on your way to a lifestyle business.
Curiously, when I ask my friends who work in venture capital what type of business they would start, most say lifestyle and not venture-backed! When it comes to which type of business is right for you, ignore what others think you should do and build something that’s right for the life you want to lead.
No comments:
Post a Comment