Why a lifestyle business isn’t a dirty word, even if it is to VCs
As an entrepreneur, you may find yourself getting told that you’re better served building a “lifestyle business, not a venture business” and hearing VCs pass on your company on those grounds. This may be confusing — isn’t a good business a good business? And your idea may be “big enough” that it could support venture money and produce a venture return. So you’ve done everything right, you’ve got a big market, real revenues, etc etc, and people are passing because of this lifestyle business nonsense — what does it mean and what should I make of it?
To start with a definition, “lifestyle business” in VC parlance means a business that could generate a healthy income for the owner/CEO (support a lavish lifestyle), but never really scale to produce a return for investors. So when VCs call something a lifestyle business, they mean that bootstrapping the business is likely the best option.
If you’ve got a reasonably sized market and some reasonable traction, why would VCs think you are/should be a lifestyle business? Typically the answer is around growth rate — either the growth rate to date is relatively slow, or the growth rate going forward projects to be slow. By slow we don’t mean near 0, we mean not near the 100% year over year growth VCs like to see.
So take this example — you’re doing $4M in revenue, growing 25% year over year. That’s probably not interesting to VCs, as the growth rate just doesn’t get you to a venture style return. However, let’s say you could run the business profitably today (generating $500,000 in profit) and grow with 50% net margins going forward.
This is where building a lifestyle business — which is a dirty word in VC language — may be gold in entrepreneur’s language. Next year, that business does $5M, and adds $500k in profit. Year 3 you’re at $6.25M with another $600k in profit and so on. 5 years later, that business is over $10M in revenue with about $4M in profit. Your business is worth $30–50M, and you generate $4M in cash to live off of, and own the business in its entirely. VCs don’t look for $40M exits. But wholly owned (or with small amounts of angel capital) $40M exits can make more than most venture style exits for the founder.
Consider this — if you’re a founder who owns 15% on exit — you’d need a $600M exit (very rare) to net $40M — whereas these types of small acquisitions happen far more frequently. So when you hear you’re a lifestyle business, don’t just take it as an insult, think about what your lifestyle could be like if you succeed and build a good lifestyle business.