7 comments

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  Rhody

  5 months ago

  The term "lifestyle business" is condescending and, quite frankly, it's nonsense, and by using it the author has managed to insult a major percentage of the entrepreneurial population. Really, there's no such thing as a "lifestyle business." Hardly anyone goes into business with the intent of not eventually growing it and maximizing its value, including the owner of the concierge business he cites. The author takes the example of the designer who works from home and therefore insinuates that all talented professionals who start their own company from home aren't interested in growth. The vast majority of entrepreneurs that I know who have started working from home only did so to keep fixed costs low - they weren't interested in "lifestyle." They were interested in working hard and making their companies as successful as possible. What about the partner from a big law firm who leaves to hangs out a shingle? What about the woman who opens a food cart in downtown, selling specialty salads and sandwiches? Or the home-based entrepreneur who starts a catalog selling imported furniture? Do you think these people are only interested in supporting a "lifestyle"?
  
  If the author has decided to overlook home-based entrepreneurs for investment than that is his prerogative. He is missing out on some remarkably talented, hard working and driven business owners. But what he shouldn't do is insult them while declining to invest with them. Unfortunately he's managed to do just that in this posting.
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  David S. Rose

  5 months ago

  OK, I'll jump in here too (Rhody, it's not that everyone is jumping ON you, but that you've raised some important points that deserve to be addressed.)
  
  "Lifestyle business" is NOT a pejorative term. Rather, it is a well-known and generally accepted expression (see <http://en.wikipedia.org/wiki/Lifestyle_business> and <http://www.powerhomebiz.com/vol100/lifestyle.htm>.
  
  It describes the perfectly valid goal of creating a business that is fulfilling economically and spiritually for the entrepreneur and his/her family. I know dozens, if not hundreds of lifestyle entrepreneurs who would not change their jobs if you offered them ten million bucks: the homebuilder who loves being out on the job and creating a hand-crafted, perfect house; the picture framer who works six hours a day at a relaxed pace and knows every one of his customers by name; the personal shopping consultant who delights in finding just the right outfit for the perfect occasion...even the top VC who quit his job at Accel partners to move to Maine and start a mail order business specializing in a cappella music.
  
  All of these businesses comfortably support the entrepreneur, each of the entrepreneurs receives great personal satisfaction from his or her business, and each is contributing to society...but not a single one of those enterprises is "venture (or angel) fundable". The point that Jason and the others are making is NOT that there is anything 'wrong' or 'tacky' or 'less desirable' about a lifestyle business, simply that the economics of it mean that it needs to be financed in some way other than risk equity. That can mean bootstrapping (usually the best option), personal savings, friends & family loans, or personal debt.
  
  The fact is, because early stage, high-growth businesses are so incredibly risky (to expand on Evan's point, only 1 out of 100 businesses looking for venture/angel funding actually gets it, and five out of ten of those go bankrupt), seed and early stage investors need to maximize the potential return. I recently led a seminary discussing the somewhat complicated math involved (see <http://www.centernetworks.com/angel-investing-s...> for a look at the key slide), but what it boils down to is that EVERY deal into which a smart angel invests money needs to have the POTENTIAL to deliver a 20:1 or 30:1 return on the invested capital.
  
  To run through a bit more of the math (and to make clear just how unbelievably tough that is), take an entrepreneur who comes to New York Angels seeing a $1 million investment and valuing his or her company at $4 million (this is a pretty typical profile for the kinds of businesses we see.) In order for the angel investor who contributes, say, $25,000 to the round to end up with an annual return of about 25% (which is about twice what you would hope to get from a hedge fund, and is commensurate with the risk being taken; remember the odds are 1000:1 that this will be "the one"!) that little startup company needs to be sold within six years for [I hope you're sitting down] ONE HUNDRED FIFTY MILLION DOLLARS.
  
  And since there simply is no way from now to the end of the universe that this is going to happen to a sole proprietor home builder, or a local picture framer, or a personal shopper or even a mail-order a cappella music label, THAT is why those perfectly valid, great businesses, run by wonderful, smart, entrepreneurs (all of whom happen to be friends of mine, by the way) are "lifestyle" businesses and not appropriate for angel or VC financing.
  
  So that is why it is really, really important to figure out at the beginning exactly what one;s personal goals are in starting a business, and what kind of financing (from bootstrapping to venture capital) is appropriate to support that goal.
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  Mark I LaRosa

  5 months ago

  Rhody,
  
  We are in no way slamming those entrepreneurs that decide to build what is referred to in the industry as a "lifestyle business." In fact, MANY successful companies are indeed that - and those hardworking entrepreneurs should be commended.
  
  However, angels invest in companies to make a return on their own money, and are not doing it to help the entrepreneur build a business that does not have tremendous growth opportunity. So, while a hardworking woman might start a very successful clothing store and make a very nice living for herself, it wont generate a return for an angel that makes it worth their time and money. However, if she were to start a company which has explosive growth because of some amazing new idea that hasn't been tried before - that's something that is potentially of interest to angel investors and VCs.
  
  The question is not whether entrepreneurs should or should not create a lifestyle business - the title was "unfundable" and VCs and Angels will NOT invest in lifestyle businesses. These type of business should seek loans and other means of funding their business.
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  evbart

  5 months ago

  The term "lifestyle business" is definitely not a condescending term. Many entrepreneurs have built success businesses that have provided a comfortable lifestyle for them and all of their employees.
  
  The point Jason is trying to make, is that this is not the type of company an angel typically wants to invest in (or can afford to invest in) because the potential returns are often not high enough to justify the risk.
  
  If you look at some of the average stats on Angel investing you'll see that typically 1 in 10 companies is a success, and this one success has to bring in enough return to cover the loss on the other 9 companies. Thats a huge responsibility, many times we’re talking 30x or 40x your original investment!
  
  To cover the responsibility Angel investors focus all of their efforts trying to find companies that can even come close to attaining that astronomical growth. Lifestyle companies typically don’t fall into this category.
  
  That’s why you see many Angels investing in scalable technologies (software, bio tech, cleantech, etc). When they have a successful technology on their hands (google, ebay, a new computer chip, etc) the sky is the limit on the returns, and it can happen very quickly.
  
  On the other hand retail stores, clothings lines, concierge services, or a variety of other businesses that could be a lifestyle business, typically can't grow this fast this quickly.
  
  Its not a matter of putting those companies down or thinking bad of them (heck, the angel investor may have made their money doing a lifestyle business), its just a financial reality that the potential for massive returns needs to be there right from the start to justify the risk.
  
  That being said, given the diversity of angels out there, you might always be able to find one willing to invest in your lifestyle business, but you might just have to spend more time searching for the right match...
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  Rhody

  5 months ago

  Thanks for all the responses. Taking into account all that you've said about risk, investing in early stage cos., etc. all of which I believe, isn't it worth considering a slight change to the angel/VC investing approach? Why try to swing for the fences every time out, if you know that a huge percentage of those deals will fall flat on their face? What's wrong with hitting singles and doubles? One of the problems I have encountered with VCs (and I suppose this applies to some angel groups too) is that they generally back technology companies that have sustainable differentiators with regards to their intellectual property. Though I understand the reasoning, it seems like that filter is way too stringent. Call them lifestyle businesses, or call them whatever you'd like, but it seems like the VCs are missing out in investing in some really good companies.
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  MyOnlineToolbox

  4 months ago

  Another way to tick off the average entreprenuer is to ask him when he feels he may need to step aside for a more seasoned executive to take charge. Most entreprenuers have a limit on how far they can go, whether it be to even get it off the ground floor, to 1 million, or to 10 million, etc. All of this is critical to the mindset of being a successful businessperson versus being a sucessful investor. In my case, I know I am capable of growing the company specifically towards its target to be acquired or merged with a larger firm.
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  1 month ago

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