'lifestyle' businesses vs fundable Startups
The main difference between a 'lifestyle' business and a real Startup is its ability to raise outside capital.
A lifestyle business is a small business that typically begins as a FF&F (Friends, Family & Fools) venture. Normally, a lifestyle business is a small business with a slow (albeit consistent) gradual growth, short term plan.
The purpose of a lifestyle business is to provide reasonable income for the founders, family & friends first, the rest of priorities are considered after (if even considered) and certainly, outside investors fall into that secondary category.
Hence, lifestyle business are typically discarded by the VC community.
Startups, by definition:
A startup venture is a high-growth, fast-paced business driven by KPIs and specific metrics. A startup, rather than providing a source of employment for founders, is more of a growth-based venture.
An entrepreneur forms a startup with the purpose of growing the venture as quickly as possible with the expectation of selling the business or going public within a specified number of years (generally 3-7 years).
The entrepreneur plans on capitalizing on the venture by selling the business for a substantial profit vs giving priority to short term employment income.
A lifestyle business is focused on short term only, aiming at achieving breakeven & profitability as soon as possible.
A startup venture follows a J curve (losses) with high growth (traction) before reaching profitability during several years.
Both the founders and their investors aim at building a critical mass of customers and a certain market position (in the case of online businesses, network effects) first to enable monetization later.
The ultimate objective for both founders and investors is to sell the business or IPO the company.
A lifestyle business is financed with personal funds, small business loans, and loans from friends and family.
A startup venture may begin similarly; however, the business is structured to facilitate outside capital from investors. These investments come at various stages, seeding, Series A, Series B, C all the way to a sale or IPO as the company grows.
The structure of a startup is generally much different than a lifestyle business. In the lifestyle business the owners will typically retain the majority of ownership and organize the activity around themselves.
Startups need to have more complex ownership and governance structures, in anticipation of growth control and to manage other stakeholders' interest throughout the several funding cycles.
Hence the need for multiple forms of stock, with different rights in order to provide the balance of control and ownership that an investor will require. The startup will likely need to use some form of equity incentive, aka stock options to hire key personnel moving forward as, still a relatively small company, attracting top notch talent requires equity incentives.
The investor & VC view
Savvy investors will run through scrutiny on entrepreneurs to understand their deep motivations.
A few simple questions (yep, similar to a Voight-Kampff test) intended to trigger a certain emotional response are enough to discard an investment opportunity and the entrepreneur. Those are emotions arising whenever founders fail to put the interest of the company (and those of its investors eventually) before theirs (and many times, against theirs).
We're working on a 'lifestyle' detector Voight-Kampff test, stay tuned for an update here.