More Than One Kind of Startup?

Incubators, angel investors and many service providers seek companies poised for exponential growth. They’re looking for talented people with killer technology in markets  that have limitless potential. Of course very few companies can actually tick all those boxes.

The Art of the “Pivot”

The truth is that some of our most successful companies discovered exciting new markets and/or killer technologies while doing something else. Their success was the result of their ability to recognize the opportunity that they really just “tripped over”.

Consultants and academics in the management field like to call this ‘eureka moment’ a ‘pivot’. Most would like to create the impression that by giving it a name, they can recreate the steps required to ensure a successful pivot. Perhaps some of them can.

Growth Business vs Lifestyle Business

While investors want to invest in high growth businesses, founders may have a variety of reasons for starting a company. In tough economic times people start businesses to build their own jobs.

Many highly-skilled older workers recognize that there can be greater job security dealing with a large customer base than with a single employer. As my father once told me, “the higher your salary, the closer you are to the door”.

While an angel investor might discourage you from starting a “lifestyle business”,  the entrepreneur should take that advice with a grain of salt. The angel investor is expressing his preference for a specific kind of business to invest in. Many lifestyle businesses don’t need investors. And equity is always a lot more expensive than debt.

What kind of Business Are You?

As a CPA and SR&ED tax consultant I operate 3 related businesses, 2 of which would be considered lifestyle businesses, while the 3rd could be either. On the other hand many of my clients look more like growth businesses.

To an entrepreneur or an early stage investor, the term “lifestyle business” is a kind of derogatory term. Certainly an angel investor should steer clear of lifestyle businesses, since he or she would have a hard time getting their money out. However the vast majority of businesses are really lifestyle businesses – and this includes some very large companies.

If you own a lifestyle business that is OK.

Embrace it – and don’t waste your time trying to raise venture capital.

Accounting Systems for Growth and Lifestyle Businesses

Accounting systems are typically very different for a true growth “business”. A growth business will quickly need to scale their accounting and financial reporting systems to suit increasingly sophisticated investors.

However most growth-oriented startups don’t begin life as a business. Rather they resemble an applied science experiment:

What is our business model?

The early customers of a growth-oriented startup are more or less a ‘proof-of-concept’ for the startup’s ‘Minimum Viable Product’.

The minimum viable product is that version of a new product which allows a team to collect the maximum amount of validated learning about customers with the least effort. – Eric Ries from the Lean Startup

By contrast lifestyle businesses most often begin by looking for customers – and most often for services provided by the founder(s). While they are more properly called businesses, they are really ‘micro businesses’. Looked at another way lifestyle businesses are more like job replacements.

Is your business really a job replacement?

Whether your conducting an experiment or building a job for yourself, you typically have some time before you need full-cycle accounting systems and regular monthly bookkeeping in place.

Once you start hiring employees and need someone to manage your receivables, you need to quickly consider investing in regular monthly (weekly?) bookkeeping.