Need startup financing? Sign up for the Funding Recommendation Engine here.
Ever pitched a venture capitalist and been told they think the business is great but that they’re not interested because the business “is more of a lifestyle business.” And then you think to yourself “What the hell is that?” or if you think you know what they mean, “I’m busting my butt to build this business and don’t have much of a lifestyle. That sounds insulting.”
We thought we’d take a look at a few different viewpoints and some of the controversy around the term. We’d also love to get your viewpoints into the term “lifestyle business” and what VCs mean when they use the term in the comments.
But first, what is a lifestyle business?
Lifestyle businesses are businesses that are set up and run by their founders primarily with the aim of sustaining a particular level of income and no more; or to provide a foundation from which to enjoy a particular lifestyle.
When the lifestyle card is pulled from its tired deck, it’s usually meant as a pat on top of the head. An “oh, that’s such a pretty drawing, dear little boy.” Ha!
Lifestyle business” is the patronizing term used by many big businesses and investors for businesses that are unwilling to pursue growth at the expense of a) the quality of their product/service and/or b) the happiness of their employees. The terms is often applied to businesses that don’t want said investors’ money.
One other lifestyle business definition from the 37signals post is given below (from the comments section):
My definition of a lifestyle business is one in which the founders live off the cash flow of the business as opposed to trying to increase the value of the equity in the company for themselves and other shareholders (ie – investors) with an eye on an eventual exit. I agree that a “lifestyle business” is often looked down upon, especially by the investment community. However, there are plenty of great “lifestyle businesses” and plenty of shitty VC-backed start-ups.
Even some venture capitalists are not happy with the term lifestyle business as Josh Kopelman of First Round Capital writes in his post “Help me rename “Lifestyle Business” stating what he believes gets deemed as a Lifestyle Business:
While venture capitalists pass on companies for many reasons, one of the most common reasons is that they don’t think the opportunity is “big enough”.
What does this mean? It means that even if the company executes as planned, the VC doesn’t think the exit will be large enough to generate the VC-sized returns. This determination is based on the venture capitalist’s “fund math” and their expected returns model. It means that VC doesn’t think he will make a big enough return by investing here.
The only phrase I’ve heard used is “lifestyle business” — but I think that is inaccurate and pretty demeaning. It falsely implies that these entrepreneurs aren’t working as hard as those of VC-backed companies. It falsely implies that these entrepreneurs are choosing a better lifestyle than they would have if they were operating a VC-backed company.
I think we need a new word. Something that isn’t demeaning. Something that doesn’t imply laziness or lack of effort.
Kopelman points to a couple of notable exits (acquisitions) of companies that didn’t raise money including HotOrNot, VRBO and MyBlogLog giving further credence to the view that the term Lifestyle Business is not particularly appropriate.
So what do you think?
- Have you ever heard after a VC pitch that you’re building a lifestyle business? What was your reaction and do you think it was an accurate characterization?
- Is there a better term than lifestyle business that venture capitalists should employ and what is it? Or is lifestyle business an accurate depiction that works?
If you’re looking for financing for your business, give our Funding Recommendation Engine a try. It’s free, and our algorithm is not condescending and doesn’t care if you are building a lifestyle business.