One way to categorize businesses is growth businesses versus lifestyle businesses. Both are great for the US economy!

 

 

 

Growth Companies (build to sell)

 

Growth businesses often require professional investors and demonstrate that they can increase revenues and often number of employees rapidly. The pay-back to entrepreneurs is that they have the opportunity to build great value in their equity (stock ownership). The entrepreneurs and investors reap the benefits of their efforts by selling the company five to ten years after startup.

 

Angels (and VCs) invest in growth companies, which they often arbitrarily quantify as startup ventures that can grow revenues to $30 million (or more) per year in five years. These are the ventures that grow sufficiently rapidly to allow investors to harvest their financings (exit), usually by selling the company to a larger public company, within five to ten years. Because most such growth ventures fail (or are not highly successful), investors seek returns of 10X, 20X, 30X or even more over five to ten years, to justify the risk involved in investing in these startup ventures.

Lifestyle Companies (build to keep)

 

Lifestyle companies, on the other hand, tend to grow revenues slowly and may or may not need a substantial number of employees. As the company matures, lifestyle companies can become quite profitable, allowing the entrepreneur to earn a handsome income over as many years as the company thrives. The equity value of lifestyle companies is modest compared to growth companies because the smaller revenues and earnings of lifestyle companies equate to a lower valuation. But the potential salaries for entrepreneurs can be quite high and these high salaries can extend over decades, depending on the nature of the business.

 

In the end, lifestyle companies can produce very attractive salaries for entrepreneurs over many years. While, the primary motivation for growth company entrepreneurs is to harvest their investment of time and money thru the sale of the company in a limited period of time.

 

Of the estimated 500,000 new ventures started in the US every year, over 90% are lifestyle companies. If these entrepreneurs need outside capital to start these ventures, friends and family are their primary source. Entrepreneurs use these sources of capital and bootstrapping techniques to achieve positive cash flow. As the company matures, banks can provide the capital necessary for operations and growth. Less than 10% of new ventures annually qualify for investment by angels and VCs: about 25,000 new companies are funded annually in the US by angels and about 1000 new companies are funded by VCs.

 

This explanation is, by its nature, a generalization. Many growth companies have been started by bootstrap entrepreneurs and grown using internally generated cash (from earnings).

Bill Payne :: Aug.05.2008 :: Uncategorized ::