How do Lifestyle Businesses Differ from Growth Companies?

June 17 2011 No Commented

One way to categorize startups is as lifestyle businesses versus growth businesses.  Don’t jump to the wrong conclusion.  Both are great for the US economy!

Lifestyle Companies (build to keep)  Lifestyle companies are usually owned and operated by an entrepreneur and his or her family, or a small group of partners.  They tend to grow revenues slowly without investor capital and most do not need a substantial number of employees. Examples of lifestyle companies could be:  single store retail outlets, software developers, restaurants, franchisees, lawyers, plumbers and many others.  As the company matures, lifestyle companies can become quite profitable, allowing the entrepreneur to earn a handsome income over as many years as the company thrives. The equity value of lifestyle companies is modest compared to growth companies because the smaller revenues and earnings of lifestyle companies equate to a lower valuation. But the potential salaries for entrepreneurs can be quite high and these high salaries can extend over decades, depending on the nature of the business.  And, lifestyle entrepreneurs can later choose to sell their companies (perhaps at retirement) without investor pressure to sell in a defined time frame.  The entrepreneurs singularly control the direction and future of the company.

Growth Companies (build to sell)  Growth businesses, on the other hand, usually require professional investors and demonstrate that they can rapidly increase revenues and often the number of employees.  Examples of growth companies could be:  software product companies, medical device companies, electronic product companies and many others.  The entrepreneurs and investors reap the benefits of their efforts by selling the company five to ten years after startup.  The Board of Directors (entrepreneur, investors and others) controls the direction and future of the company.

Angels (and VCs) invest in growth companies, which they often arbitrarily quantify as startup ventures that can grow annual revenues to $20 million (or more) in five years. These are ventures that grow sufficiently rapidly to allow capital sources to harvest their return on investment (exit), usually by selling the company to a larger public company, within five to ten years.  About half of growth companies fail in the first five years.  And, less than one in ten of angel or VC funded companies are wildly successful home runs.

In the end, lifestyle companies can produce very attractive salaries for entrepreneurs over many years.  The primary motivation for growth company entrepreneurs and investors is to build equity value and harvest their investment of time and money thru the sale of the company in a relatively short period of time.

Of the estimated 500,000 new ventures started in the US every year, over 90% are lifestyle companies.  If these entrepreneurs need outside capital to start these ventures, friends and family are their primary source.  Lifestyle entrepreneurs use these sources of capital and bootstrapping techniques to achieve positive cash flow.  As the company matures, banks can provide the capital necessary for operations and growth. Less than 10% of new ventures annually qualify for investment by angels and VCs:  About 25,000 new companies are funded annually in the US by angels and about 1000 new companies are funded by VCs.

This differentiation of lifestyle and growth companies is, by its nature, a generalization. Many growth companies have been started by bootstrap entrepreneurs and their families and grown using internally generated cash (from earnings) without investor capital to huge companies over time.