Lifestyle or High Impact Business: 5 Points of Differentiation and Why Investors Care
Bill Payne, an internationally recognized entrepreneur who has founded or invested in more than 60 start-up companies and assisted in founding four angel investment groups, is coming to TechColumbus later this week to lead a half-day workshop entitled Financing High Impact Ventures.
No matter how many times I work with Bill,* I always come away with fresh ideas—even if the topic is familiar. This time, Bill’s investor perspective on the two classic types of companies—lifestyle businesses and High impact businesses—struck home with me.
Here at TechColumbus, we receive inquiries from entrepreneurs who want to start both types of companies.
The top of our intake funnel is deliberately wide. Even though our expertise and resources are focused entirely on High Impact firms, we don’t expect that every entrepreneur who inquires or comes through our door will become a client. But we also don’t want to discourage any person who is contemplating starting some kind of a business in Central Ohio.
Instead, we want to efficiently help entrepreneurs clearly frame what they want to do and then help them understand whether or not their business ideas have the potential to attract the required capital investment from venture funds, angel investors, or VCs to build a sustainable company.
Here’s that conversation in 5 points.
1. There are two classic types of companies: lifestyle business and High Impact companies. Both types are founded by entrepreneurs. Both types are risky, require investment capital, great tenacity, and a solid understanding of customers and markets. But the goals and scalability of each type of business plan are radically different.
2. Most services businesses are lifestyle while most High Impact businesses create products. Single store retail is typical; legal firms, housekeepers, and construction companies are examples. Life style product businesses might be consumer goods, specialty foods, customized hardware or vehicles. Income is the objective, not building equity. Many entrepreneurs make a very good living from lifestyle companies. Their goal is to leave the business to their heirs, sell it to employees, or sell off the assets in an orderly way and shut the business down.
High Impact businesses are in IT, advance manufacturing, biotechnology, and green energy to name a few. Growth and building equity are key. Personal income is not the goal. Entrepreneurs who found High Impact companies intend to exit the business via acquisition or IPO.
3. Startup costs in most lifestyle businesses are significantly less than in High Impact companies. The range peaks for lifestyle at around $100,000. That is at the low end for High Impact range, which can exceed a million dollars for medical devices, electronic products, and mobile telecom, and exceed many millions for biotechnology development.
4. In High Impact companies, regional job and wealth creation scale; lifestyle growth becomes steady state. High Impact firms are responsible for the overwhelming majority of net new job growth over the last twenty-plus years.
5. Venture funds, angel investors, and VCs seek the type of exponential returns that High Impact firms have the potential to deliver. They don’t invest in lifestyle firms. Banks, friends, and families may. Lifestyle businesses require less capital, create jobs up to a point, and are often tied to the founder’s leadership and influence. High Impact companies create more and higher paying local jobs, produce a ripple economic effect through the economy, and contribute to investable capital upon acquisition or IPO.
Entrepreneurs have different reasons and goals when they start a company. Any company that creates new jobs in Central Ohio is a good thing. Smart entrepreneurs will create a business plan that matches the appropriate sources of capital with their business goals.
*For the record, Bill Payne and I have worked together in lots of ways over the years—as mentors, educators, investors, board members of the Angel Capital Association, and as fly fishermen, although casting for trout in the glorious streams of Montana hardly qualifies as work. Bill also shared his experience and ideas on best practices as input to a chapter I contributed to Biotechnology Entrepreneurship, edited by Craig Shimasaki.