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Is your startup a lifestyle business?

Do you believe your startup ought to be featured in TechCrunch in an article that announces you were just acquired for $200M? Do you dream of hyper-growth, customers flocking to your site by the millions and changing the world?

One way to know if this is in the cards for you, is by reviewing your priorities.

I was having breakfast with the CEO of a startup a few days ago – he was puzzled because his startup wasn’t growing as fast as his competitors. “I see my competitors being acquired by large sums of money, even when they have no revenue!”, he said, “Why can’t that be me?”. He continued, “I have revenue, real customers, and a good product… does that not matter anymore?”  The core difference between his company and these other startups was in his priorities, which in turn defined how he looked at the world.

Consider for a moment which of these two priority lists is closer to your set of values:

Priority List A:

  1. Personal income
  2. Company Profitability
  3. Revenue growth
  4. Customer growth

Priority List B:

  1. Customer growth
  2. Revenue growth
  3. Company Profitability
  4. Personal income

If you selected “A”, you probably have what investors call “a lifestyle business” – a company whose primary purpose is to provide for you and your family. There is nothing wrong with this, but do not expect to have venture capitalists knocking down your door to invest in your company – they will steer clear away from it – and most probably you will not end up in that TechCrunch article.

If, on the other hand, you selected “B”, you have the a value system that can create a high-flying startup that will be acquired for a lot of money… or fail within a few months.

The reason is that there are deep implications that stem from these priorities – here are a few:

Resource allocation
In a lifestyle business, an inordinate amount of money is paid out to the CEO/founding team, which puts a burden in the amount of money left for marketing, R&D and sales expansion.

For example: let’s assume you have a startup that sells $1M a year. If the startup is profitable and the CEO takes a salary of $150k/year, that is 15% of revenue! Compare that with a similar business where the CEO is working mostly on “sweat equity” for a future payoff and takes home only $50k/year… that leaves an extra $100k/year in the company, which makes a tremendous difference because it can be used to hire additional employees, develop the product further, buy advertising and otherwise drive growth for the company.

Attitude towards risk
If you see your business as a source of current income, and depend on it for your livelihood, you will probably not take large risks, pivot strategies quickly, or go for riskier, aggressive approaches to large markets because they will make you uncomfortable. Although you might see opportunities go by, you will not make the investments needed and take the risks required to really go after them. Growth efforts will probably become tentative steps, small projects and controlled tests – far safer but with a dramatically lower probability of ‘hitting it big’.

On the other hand, if you have only a few months to either grow substantially or run out of cash, you will probably evolve quickly, take bigger risks and do your utmost to achieve that elusive product-market fit so you can get additional funds and survive.

Strength of the management team
When the CEO or founder has a high current income, it becomes difficult to attract a first-class management team that wants to throw in a lot of sweat equity in exchange for a future return because of the lack of alignment with the CEO (“How come I am not taking home almost any salary and we can’t afford more marketing while the CEO is taking home six figures?”). Of course, typically the startup can’t afford to pay regular salaries at market rates for such a management team.

Time-to-exit
One key tenet of investing is making sure the company has a reasonable exit strategy. When a CEO is in a relatively comfortable position and derives significant income as salary, a risk exists that she is not motivated enough to drive the company to the exit that will enable you to capture the return on your investment.

This is why investors prefer to invest in companies that exhibit Priority List B.

The thinking goes something like this: “I am looking for a high return (20x) on my investment, so I am willing to invest in this company only if the CEO is willing to invest his time with little salary. This will align both of us to recruit a strong management team of like-minded people and make a substantial effort over the next few months to look for a big payoff. If we can adjust our strategy and product to the point where we see successful results and demonstrable growth, then we will be able to get additional funding to go on to the next stage. Otherwise, I’ll just write the investment off and move on.”

So – do a bit of introspection and clarify your priorities. There is nothing wrong with a lifestyle business. It can be a great source of satisfaction, make significant money and provide for you so you can live comfortably. However, in all likelihood you should not spend your nights wondering why you are not attracting investors. Yes, if you are lucky enough to get it just right with very limited resources you might become the exception and have that article after all… but in the words of M. Henos: ”Hope is not a strategy”.

 

Comments ( 5 )

  • Wayne says:

    I am the (B) Guy!
    Looking for an Investor or Company Buyer that will help take this to the next level!
    Customer growth – Our Product and Services are directly related to saving our customers lives in the area of Law Enforcement and Military Combat training products
    Revenue growth- On a shoe string budget we sell out of product
    Company Profitability – Self Funded
    Personal income – I put everything in the business which is sometimes taxing.

  • Teniola.BBN says:

    I specifically needed to know the difference between a lifestyle business and being in the ‘B’ category, so when i found your article – it was right on point. Thank you. My business right now is obviously in the ‘A’ category – but my plan is to move it into ‘B’. What strategies or techniques would you advise to making a successful transition?

    • Roberto Moctezuma says:

      I think there are three elements of a successful transition: strategic, emotional and operational.

      The strategic element means you have to be able to create a credible vision that will galvanize investors and employees enough to incent them to get on the “growth track”.

      The emotional part means that you have to be comfortable with a higher level of risk and the gradual loss of control over your company that typically happens as you introduce investors, a board, etc.

      The operational part can be addressed through an infusion of capital – typically from angel investors – that will let you scale up your business to get on a growth trajectory.

      If you are interested, I’d be happy to discuss this in more detail via email or in a quick call – let me know.

  • Rodrigo Fuentes says:

    I’m curious, Roberto, did you have “Priority List A” or “Priority List B” when you were at the Pentamex startup?

    Relatedly, do you think the “lifestyle” framework can or should be applied to investors? For example, are some investors looking for a “lifestyle” fund — living off the management fees? Whereas other investors are looking for riskier bets and strategies?

    • Roberto Moctezuma says:

      At Pentamex we had Priority List B – the intention was to substantially grow the business – and were doing very well until the economic collapse of 1994 hit us hard.

      On your second question, yes, I do believe that some “investor group organizers” might be aiming more for management fees and profit from events instead of return on invested capital…

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