What is a startup vs a lifestyle business (and why it matters for VCs)

There is a lot of misconception around the moniker “lifestyle business,” with many founders thinking it’s an insult, which is understandable since said moniker usually comes from an investor with a pile of money and who is giving a “hard no” to a founder who just spent the time to pitch them — in rejection, comes reaction.

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When people in Silicon Valley call a startup a lifestyle business, they are actually implying that it’s a GREAT lifestyle for the founders, perhaps with a certainty of pulling out a million or two in profits a year, as opposed to the 5-10% chance of waiting a decade to have a greater return.

VCs tend to be impressed with these lifestyle businesses and their advice is given because it’s in everyone’s best interest — it’s certainly not to diminish founders.

As I mentioned above, the timing of the lifestyle business assessment is a key issue here. The founders getting this designation from investors want VCs to invest in their businesses, and have poured their hearts out in pitch decks and partner meetings — they believe that they deserve to clear market and they haven’t.

Many investors don’t have great bedside manners and don’t unpack their choice enough not to invest, based on my experience as a founder, investor and in running an accelerator with almost 100 graduates.

At LAUNCH, we like to walk founders through our “declining to invest AT THIS MOMENT,” with a lot of details. This acts as a great moment for us to codify our decision-making in a transparent way with the founder and gives the founder the ability to remind us of how stupid we were years later.

A simple email like this can take the edge off the “no”:

“Jane & John,

We really enjoyed hearing your vision for Acme Incorporated. We are going to pass on investing at this time because we are unsure if this can be venture scale. Venture scale today means having a realistic chance of hitting $100M in revenue in under 10 years, with great margins. If we’re missing something, please let us know because we often get it wrong.

Also, “at this time” is the key phrase in this email, we often invest years after first meeting a founder, so we would love to stay in touch with you. You can send your monthly updates for investors/non-investors to
updates@launch.co. We read them all and we respond to many.

Best, Jason”

If I think it’s a lifestyle business, I will often say to the founder:

“Most VCs are not going to consider this venture scale in my opinion, because it’s based on low margin service revenue. I wonder if you’ve considered optimizing your business to throw off two million dollars a year for the next ten years.

If you do that, you will make $20M and still own a great services business you can sell for 2-5x EBIDA at the end of that decade if you want. That will give you $20M in earnings and a final $4-10M sale at the end, if you do sell.

Most founders never make $25M+ from their startups, so you might want to avoid VC money and go for the sure(r) bet.”

This tweet was super instructive in regards to how much misconception there is about the lifestyle business designation.

Venture capitalists are not trying to offend or make founders feel bad by saying they have a lifestyle business. That’s a naive reading of the situation. If a venture capitalist tells you that your business isn’t venture scale, they likely believe it, and are telling you so that you don’t get yourself into a dysfunctional situation, and so you’ll have a better outcome.

No venture capitalist wants to be on a dysfunctional board with an unhappy founder — that’s literally the worst scenario an investor can be in. They avoid it at all costs.

Best,
Jason

PS – Do you know an awesome lifestyle business that is throwing off $1M in profits and wants to try and 100x it? Email 100@launch.co

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