life-style businesses versus high-growth businesses

In 1998, after having worked at a number of start-ups, I started my first company (BroadJump; with 3 co-founders).  You could fill an ocean with all the things we didn’t know about start-ups, business plans, venture capital, and so on.  One thing we did know, because our investors made sure we understood, was the difference between a life-style business and a high-growth, venture-backed business.  The difference was spelled out primarily in terms of returns:  it was typical for high-growth / venture backed companies to gun for a 10x return or better on an investor’s capital. While the goal is much the same today, the “10x return” is increasingly rare in either acquisitions or IPOs and what makes a good return is up for discussion.

Let’s define what “life-style business” means (to me, in any case):

  1. it’s short hand for a business that, in general, does not REQUIRE or USE professional investors (venture capital) money to finance operations. When a business uses OPM (other people’s money), the explicit (or in many cases implicit) agreement is to accept the investor’s expectations around outcome and business’s performance.  Not using OPM means that life-style businesses typically are not obligated to growth / performance goals beyond “making ends meet” sort of profitability. If they happen to exceed such goals, fantastic.
  2. As a consequence of #1, life-style businesses are sink-or-swim operations for founders/principles who typically have much greater control, ownership, and accountability (fewer boards, fewer executives).
  3. “business sustainability” is significantly prioritized over “growth and scale” – this is inclusive of the notion that a life-style business is not built for a certain type of exit within a certain time frame

Here’s the point: a blind “swing for the fences, get a 10x return or die trying” approach to starting and growing a business is simply not realistic in today’s environment.  I’ll be the first person jumping for joy if those days return but I don’t see a reason to believe that they’ll be back any time in the next 3 years, if ever.  Some market segments are worse off than others, but every segment has been negatively affected to some degree.

For start-ups, especially web/software/SaaS start-ups, I believe the following is a time-and-place appropriate approach to growth:

  1. a highly-efficient, life-style business approach from seed-stage through profitability (or very close)
  2. an openness to positive exits at any stage (this has implications on control and ownership)
  3. balanced analysis ahead of using OPM to enter “high-growth” mode – but not losing the highly efficient heritage

UPDATE: March 28th:

There’s an interesting post at Techcrunch on the topic of risk aversion and selling early that makes sense to comment on given #2 above.  In short, the article makes two arguments for why companies sell early instead of swinging for the fences: after-the-fact risk aversion where companies sell as soon as a viable offer comes in rather than double-down and go for a much bigger return.

Most people in the world would take the certainty of $1 million over a chance they could make $30 million. I’m not knocking that. I’ll sell SarahLacy right now for $1 million. (Takers?) But I tend to think of people who make that decision as being risk-adverse. What was surprising to me, is that people who have a huge tolerance for risk on the front end– literally creating something out of nothing—become risk-adverse when they’ve proven that it’s actually worth something.

After-the-fact risk aversion is probably related to the second reason in the article: founder’s like solving the technical, early problem but not scaling and growing the company with discipline. The author also lumps Sarbanes-Oxley requirements of public companies into this category.

In other words, “the art of the hack.” Once it’s solved, managing the company, growing revenues, taking on HR problems—all of that is the boring part. He loves starting companies and has been successful at it, but he has zero desire to build one into the next Google. There are a lot of guys like that in the Valley, too, but they’ve also got a huge pool of experienced managers to hand the company off to.

I think both of these are true and worth assessing as any company grows. There will always be points in time and company scale where founders / managers fall out of their comfort zone – that’s one definition of success, by the way. That fact of start-up-dom is entirely distinct from how a company should execute:  you can always hire in experience scaling and growing a company at any stage; you can also find smaller parts of the larger problem to scratch the problem-solving itch that commonly excites early employees. Doing both could make sense if the decision is to double down and grow the company and its value to customers and the market – but make this last decision first, in the presence of as much data as possible; what to do about risk aversion and the love of problem solving will follow.