I know of a company near me that has $300M/year revenue (gross, not net) that sells cables and other equipment to ISPs in the region. It's owned by one person. I don't know their margins, but that person might be making $20M/year. They might be able to grow that business and sell it for $500M dollars if they play their cards right. I wouldn't call that a "lifestyle" or "small" business. It's somewhere in the middle.
I think it's the latter type that the article is referring to.
Seriously, please get out of the SV bubble.
By whom?
The problem is with this definition of "lifestyle business". What is the cutoff? What does it mean to "support a lifestyle?" If a company makes 10M/year and it is growing at a healthy pace without VC capital, is it "lifestyle"?
If someone makes a living of investing in fast food franchises, each shop by itself taking 500k of initial investment and then returning $100k/year in profit, do you count each individual franchise as a "lifestyle" business or the whole thing as an "equity investment"?
Like others said already (and maybe that is the point of TFA), this definition of "lifestyle business" seems to serve only as a way for VCs to downplay the significance and importance of so many businesses that exist in every sector.
Cut off is “would an investor buy equity for growth”.
Some people own say 5 mcdonalds franchises: the owning business might be a growth one if they are planning to expand. Might be lifestyle if they don’t. Dynamics matter as much as a static snapshot view.
Might be a middle ground but I think it is small. Coops for example.
Almost by definition, a lifestyle business lacks the potential for massive growth. If it has it, and the owner tries to 'hold it back' someone else will come along and capture the rest of the market. The incentive to do so is large.
Occasionally, you will see privately held businesses that have the potential of startups, but they are not lifestyle businesses (maybe mailchimp). They grow into full fledged businesses that just happen to be privately held. They will often find ways of funding their growth (and have options for doing so), even if that isn't VC.
That said, lifestyle businesses are awesome for your lifestyle. I didn't think I wanted one until I ended up with one, and it turns out high-ish income, total control of your time, and direct positive relationships with customers are a great lifestyle for me.
There are many paths to becoming rich that don't involve VCs and billion dollar exits. 99% of entrepreneurs don't talk to or know anything about the VC system. But if you are in tech and want to hire the best possible team to create something new, you need a lot of capital because those people are super expensive labor. And VCs don't want to give you $XX millions of dollars if the potential return is 2x. So that's the system we have in tech.
I’ve seen plenty of job openings where companies want “ninja rockstar 10x developers” to write what ends up being something that anyone who knows the latest MVC framework with three years of experience can do competently.
And most “entrepreneurs” who own franchising are barely middle class and “bought a job”. The average fast food franchise, convenient store averages about $70K a year and that’s with the owner working insane hours and putting their family to work as free labor.
Back at my peak. Me and another guy got a new startup to 1,000 paying clients in b2b space in 2 years. We had a few “regular” guys that helped out, but they would have taken 20 years to do what we did.
Where can I find industry stats to explore this assertion?
https://www.mashed.com/178309/how-much-mcdonalds-franchise-o...
7-11 is between $50-$75K.
https://mobile-cuisine.com/franchise/7-eleven-cost/
Subway is about $40K a year
https://www.eposnow.com/us/resources/how-much-do-franchise-o...
It is neither a lifestyle business nor a shareholder-driven business.
My (very wrong) opinion on what Mittelstand is: I think of a small-to-medium sized company that manufactures (I've never thought of service providing companies as Mittelstand) one group of things at a very high and competitive level. I think of companies that are pretty much strictly B2B. These are mostly family-owned businesses, but for me that doesnt need to be true. Companies that you only know of, when you need to know. And when you do need to know about them, you most definitely will know about them.
Again, this definitely isnt what most people consider to be Mittelstand. Just my view on it.
all this is still around ya know
people act like they just forgot
Lifestyle small businesses are great too, but I'm really talking about companies with $10M+ revenue potential.
You can get top-tier VC returns by building a portfolio of Mittelstand businesses ($10M-$1B in revenue).
The fact that SMB is literally two categories (Small and Medium Business) but effectively one category is a great way to capture the frustration here.
I’m not sure this is true. You could get good relative percentage returns, but in terms of absolute returns, I’m not sure the math is there. Meaning, if you invest $1M in a smaller company and get a 20X return, that’s pretty good. But smaller companies won’t have much more need for investment capital. So, your absolute return is limited to $20M.
Now, if you have a larger company that needs $100M in investments (over multiple rounds), but still gets a 20X return, that’s a $2B return.
You have the same relative rate, but a massive difference in absolute numbers. To get the same absolute return, you’d need 100X more companies in a portfolio, which is just not manageable. Even with a 2X return in a $100M investment, you’re still way ahead in absolute terms. ($100M >> $19M)
What I think you’re really trying to argue for is that there needs to be smaller VC portfolios with smaller expectations. I think this is possible, but it’s more difficult to hedge bets with smaller expected returns.
Constellation software does exactly that. They've quietly been the Warren Buffet of SaaS business for like 20+ years now.
That’s his point. Small businesses can become unicorns - but they need space and time to grow. We need a better environment, and a more nuanced understanding, of them.
My skept-o-meter went off-scale upon reading this. Can you point to exactly when BH was a lifestyle business and what they were doing at that point that would classify them as a lifestyle business?