Huge Lifestyle Businesses

The term lifestyle business has a negative association with it in the valley and it shouldn’t. Lifestyle businesses can be incredibly successful and can pay for the day-to-day things you need, while working on something you love.

Being in the valley, I hear and see business pitches all the time. Quite often, someone pitches me a lifestyle business looking to secure venture financing. When I tell them, “I think this is a great idea, should be solved, and would make a great lifestyle business,” I see disappointment.

For some reason, they take this as negative feedback, and they shouldn’t. Lifestyle businesses can pay you an incredible amount of money. When I tell them this, the question asked is, “If that’s true, why won’t venture capitalists invest in lifestyle businesses then?”

Lifestyle Businesses Aren’t Easy

First, it’s important to note that although lifestyle businesses, like all businesses, are incredibly challenging. Building a business is difficult regardless of size of the opportunity.

A lifestyle business can fulfill all the things you are looking for in a startup. When I ask the people pitching me, what makes you want to found a startup, the reasons given can be answered with a lifestyle business.

The only answer that can’t be found from a lifestyle business, is if your whole goal is to raise venture financing.

VCs and 100x returns

Keval Desai told me that in order to succeed, venture capitalists need 100x (or more) returns from their companies. Looking at the venture capital landscape only using numbers and not ideas, this makes a lot of sense.

90% of businesses fail. So, if the limited partners of the venture capital firm want a 10x return on their money, then the vc needs each company they invest in to return 100x.

Think about this for a second. If a venture capital firm invests 1 million dollars in a company they are looking for 100 million in returns. A venture firm usually takes between 18 - 25%. Neglecting the pro rata, upon a liquidation event the company needs to be worth $400-550 million.

Only a $50 Million Business

Understanding that a venture firm is only willing to invest in companies with those types of liquidations, means there are plenty of 5, 10, 50, and 100 million dollar opportunities for lifestyle businesses.

Unable to secure funding, you will need to bootstrap. This will make you hungry and help you focus your vision on what you need right now, rather than the big picture you may address someday. This is a bottom up approach to identifying the vision of your company.

Not VC Backed Now, Doesn’t Mean Later

You don’t need VC in order to be successful. Before venture capital, people built successful businesses. Even today, outside of the valley, tons of people build successful businesses with limited resources.

If you don’t start with venture capital, it doesn’t mean you can’t later on take venture capital. Both Github and Atlassian both bootstrapped their businesses and later both took huge financings, so bootstrapped, lifestyle businesses can take venture if they are showing great traction.

Looking at the numbers, lifestyle businesses can be incredibly successful. If you pitch someone your idea and they say it sounds like a great lifestyle business, don’t take this negatively. All they are saying is it sounds like a 100 million dollar idea to me.