Lifestyle Business vs Startup What’s the Difference?
If you’ve ever entertained the idea of launching a business this might be a question that’s come up for you. We hear a lot about startups and entrepreneurship culture, and even glamorize it, but do you really know what it means? If you have a blog, an arts and crafts business or even do a bit of online teaching are you a lifestyle business or a startup? Lifestyle business vs startup what’s the difference? Let’s dive in.
Knowing what kind of business you’re talking about, a startup or a lifestyle business, is important because these are two very different trajectories. I’ve had the opportunity to be part of both so can speak from first hand experience.
It’s not like one type of business is better than another. It’s more about aligning your expectations with the type of business you’re thinking about.
Let’s use a vehicle analogy. I have a car, this is great because I have the freedom to drive around and might even be able to take a few friends. Having a car is like having a business.
Now just because I have a car it doesn’t mean that I’ll be entering into car shows, doing road trips or even heading to the beach with it. For that you might want to know what kind of car you have.
Imagine you have a two seater and you ask your friends to go on a road trip. You might get a strange look. Likewise, if you had a Prius and you told your friends you want to hug the curves of a race track for the day. This might not exactly spark their imagination. So aligning expectations with the kind of car you have is important.
It’s the same approach for the type of business you’re considering.
So what’s the difference?
When you talk about a startup, especially if it’s very young, you might be referring to just a few people sitting in a garage. Think of the silicon-valley or dorm room company where you have a small group of passionate adventurers starting something.
A key part of this vision is that from the very beginning the point is to grow the business. It’s also a business that has a vision others can buy into. The business is more about the product or service than about the team running it.
Another distinguishing factor is that it is investable. I don’t mean by friends and family, I mean by professional investors. A neutral third party would be able to evaluate the business and see enough potential growth to make their initial investment worthwhile.
Most investors are looking for a return on their investment within a few years. They need to be able to see that possibility in the business. This doesn’t mean that an actual investment has occurred. It also doesn’t mean that the business needs to take on this kind of investment. The only requirement here is that the business is the right kind of business for an investor.
If a professional investor, after looking at the business opportunity, would determine that there is a likelihood that they could see a decent ROI, then the business is more than likely a startup.
This is because investors don’t invest in lifestyle businesses. They don’t invest because they don’t see a path to growth, don’t see ROI potential and their incentives aren’t aligned with the underlying business.
A lifestyle business doesn’t primarily exist to grow and provide ROI for investors. A lifestyle business exists because the founders or business owners want to own and operate the business. It supports their lifestyle.
There’s nothing wrong with this type of business, just like there isn’t anything wrong with owning a certain type of car, but understanding what expectations come with the car you have is still important.
The Lifestyle Business
You know you have a lifestyle business when the business centers around the business owner or owners. You have a lifestyle business when the business’s main goal is to provide an income or revenue stream to the owners.
This category of business are typically businesses like family-owned restaurants, locally-owned convenience stores, a landscaping business, a personal blog, or social media business.
Related: Growing a new blog: First 3 months
They typically aren’t targeting, and may not even be appropriate for, an eventual IPO or merger or acquisition.
You might say providing a revenue stream is the point of any business, which is true. The key difference here is that the primary goal of the revenue stream is to support the business and support (and possibly enrich) the owners. That’s not a bad thing, and you can definitely earn significant revenue with a great lifestyle business.
The point is that the lifestyle business isn’t one where an outside investor would see an investable opportunity.
As a lifestyle business if you’re already profitable and making a handsome revenue, why would you want an outside investor to now own part of your business when you’re doing just fine?
That’s a great question. But if you’re asking this question and your business is the type of business that wouldn’t benefit from the outside investor, then you’re likely in a lifestyle business.
Investors don’t Fund Lifestyle Businesses
Let’s look at it from the investors perspective for a second. As an investor I’m not necessarily looking to invest just to get a piece of a revenue stream. That would likely take way too long to recoup the original investment and to realize a decent enough ROI.
As an investor I would consider other opportunities first, for example real estate flipping, or stock trading or some other means of quickly generating returns.
Often an investor’s money isn’t all their own. If it were, that would align their incentives a little more closely to the friends and family category than a professional investor category. A professional investor gets paid to find the best use of capital and find the highest possible ROI.
So as an investor I’m looking for growth, not revenue streams. I am looking to own a part of a growing business so that my initial investment grows, and upon sale, my ROI is based on business’s growth.
The ROI of a sale of a growing business stake is usually significantly higher the ROI possible from any revenue generated by the business.
In fact, if there is enough revenue to pass some of this along to the business owners, as an investor my incentives are to put all that money back into the business.
Capital is fuel for a business (which is what an investor brings) so an investor would rather see the business growth (i.e. adding fuel for “free”) rather than see that capital paid out to the business owners.
The Investor Mindset
Typically a lifestyle business owner would rather benefit from their hard work in the business than to prioritize growth for an investor. This is especially true if the investor is looking to exit while the business owner is looking to continue to operate the business.
So if ROI and growth are the focus of an investor, then opportunities that can scale quickly, address big markets, have unique barriers to entry and are differentiated versus other investments is what I am focused on.
Most lifestyle businesses don’t have these characteristics, where as a startup might. So understanding these trade-offs from an investors perspective is a key way to know what kind of business you’re dealing with.
Can a lifestyle business become a startup?
This is an interesting question. While not common, the answer is yes, but it usually only works one way. Sometimes a lifestyle business can become a “startup”. In reality by the time a lifestyle business makes this shift, it’s a fairly large entity already, so it might not seem like much of a “startup” anymore.
Some examples include companies like PF Chang’s, Lynda.com and Patron (yes the tequila). These companies started as small shops owned by the founder and operated mainly for their founders and their team. These businesses supported the owners and provided a very nice source of revenue for them.
Then along the way, something happened. These businesses grew steadily but at some point the business exceeded the initial interests or motivations of the original owners. At the same time outside investors began to see the growth potential in the form of expansion and diversification.
All of a sudden after many years of slow steady growth with the original business owners, the possibility for ROI coupled with a change in the management makes these businesses investable. Thus completing their transitions from lifestyle business to “startups” albeit fairly advanced ones.
Whether you’re thinking about starting a business or becoming part of one, it helps to understand what kind of business it is.
Sometimes certain businesses are called startups when in reality they are just lifestyle businesses. There’s nothing wrong with that, it just implies a different way of thinking about the business. Not only can this help align incentives it can actually help avoid confusion and misunderstandings in the beginning.
It might even be a great question to be asking yourself or your partners. After all starting a business can be a great adventure and the more you know about the journey the higher your chances of succeeding.
Have you had to answer this question before? Do you have examples of where this has come up for you? I would love to hear about it in the comments below.