Lifestyle vs Investment : Choosing a runway for your startup
When you are starting up a new business one of the early BIG decisions you have to make is what kind of runway do you want to take off on. There are really two options which I call Lifestyle or Investment. Before we get too far let me define a bit more of what I mean.
What’s a Runway?
Basically a runway is the time frame in which your idea is funded. If you run out of runway before your idea is self-sufficient, then, continuing with the analogy, you crash. Technically you didn’t get off the ground so you didn’t crash so much as you veered off course or perhaps you caught fire on the tarmac or… ok, it isn’t the best analogy, but you get the point.
Even the smallest startups have a runway of some sort even if they don’t know it. You may fund your idea while you are still working your regular job. In this case your runway is essentially infinite because your salary pays for everything. The downside is that you have a regular job so your plane isn’t moving very fast.
You can also get loans or family and friends pitch in… all of these create a runway. But before you get too far it is often helpful to decide which runway you want to build. Now we are back to where we started: Lifestyle vs Investment.
Investment: Other People’s Money
An investment runway is made of gold!! Well, at least that is how a lot of media and tech websites portray it. Unicorns! Decacorns (yup, that is a silly name for a real thing)! Parties all the time! Fancy offices!
You get a pile of other people’s money to build your dream.
- You can hire up and build fast.
- You can scale to market quickly.
- You have some flexibility to pivot and try new things.
- You are in less of a hurry to make money (which can be a blessing or a curse).
- You have the ability to build a BIG company (and in the process become fabulously wealthy).
You can probably tell me at least 10 companies that fit this profile, but here are a few well-known examples: Amazon, Twitter, Uber, Lime, all of the Y-Combinator graduates.
It all sounds really nice, and lot of it really, really is. The potential problem is… it is other people’s money. For their money they want ownership and they have high expectations of a BIG return. With those expectations you get pressure. A good investor will believe in your vision and give you the time necessary to make it come to pass (bad ones… not so much). However, if you take too long they have the right to take their ball and go home.
The real issue I often see is that many new founders think that Investment is their only option and that is simply not true. They think that if they don’t get an angel involved or they don’t prepare their deck for a VC firm STAT that they are doing something wrong. Again… not true.
This often get compounded by the fact that many accelerators are built around the idea that Investment is the true and holy path. It is a good path for sure, but it isn’t the only path.
Lifestyle: The path less talked about
A lifestyle runway means that you are aiming to build a company that is self-sufficient quickly. The money for this often comes from your own savings, friends and family, or a small angel investor. This is a viable strategy for a LOT of startups (including yours most likely), but for some reason it is frowned upon by a lot of startup culture.
- You own it, or at least the vast majority of it. This means you don’t have to listen to anyone if you don’t want to.
- Because it is your company, a lifestyle business is often a much more “pure” version of your vision (for better or worse).
- Higher potential for personal wealth (keep reading, I will explain).
- A lot less hurdles to jump.
- Virtually all agencies/consultant firms (including mine by the way).
- “Mom and Pop” shops (yes, those still exist)
- Dyson (Yup! The amazing vacuum and crazy hairdryer company had no investors from 1993 to 2015.)
The biggest “downside” of a lifestyle runway is that often your ultimate business will be much smaller than one backed by investors (though not always… Dyson, for example, made $4.5 billion in 2017).
The other downside to a company funded this way is that you don’t have a lot of flexibility to make mistakes and break things. You need to find a way to monetize pretty quickly or you are going to run out of runway…
I see my path, but I don’t know where it leads…
Now that you know about the two main types of runways, how do you choose? Well, the decision might already be made for you:
- In your wildest dreams, how BIG can your idea get? Is your idea truly earth shattering (AirBnB, Uber)? Think it could be a billion dollar idea or maybe just a million or two? If it is the latter, congratulations… you are a lifestyle business. Investors rarely invest unless there is a big upside that can pay them back 10X.
- Does your idea work when it is small? Can it become self-sufficient without a significant amount of money up front? In other words, do you need to build/hire/research/scale before you can really see where your idea goes? If so… you need an investor! A lifestyle business needs to take care of itself and your idea needs to grow fast which means you need an investor. With all that said, in my experience, it is pretty rare that a founder HAS to go the investment route. Usually they just choose to.
- Do you play well with others? Can you stand the idea of not owning your idea? If you go investment, it is likely that, in the end, you will not have a controlling share of your company. Jeff Bezos, for instance, started Amazon, but currently owns only 16.3% of it (he is doing just fine though). If the idea of not owning your idea gives you hives, then you should go lifestyle.
- Do you want to run a big business? This is similar to #1. If you have dreams of running a large corporation or making a big exit, then, odds are, you need to seek investment.
When people think of starting their own business they usually do want to do it because: a) they don’t like their job, b) they feel the call of destiny, c) they want to get rich. Since wealth is often a big part of many early founders decision making process, it is important to note how the runway can affect it.
Imagine this. You start a new business and within 5 years you grow that idea from $0 to $1,000,000 in revenue. Pretty sweet right? That would constitute a pretty successful business right? That will depend on how you got there.
As a lifestyle business you, as the owner, can probably afford to pay yourself a pretty amazing salary. $100,000 to $250,000 per year wouldn’t be out of the question here.
Now imagine you took $500,000 in investment from some local Angels/VC’s. Things start to looks a bit different. At a million revenue no one is particularly excited and you are eating ramen for dinner…
The point is… when it comes to wealth the biggest difference between the Investment and Lifestyle runway is scale. In our example up there you could end up a pretty wealthy person with that lifestyle business. You are no Zuckerberg, but you are in the top 10% percentage of wage earners in America. Which appeals more to you? No wrong answers here…
Changing Your Mind
Here is the kicker and the number one reason that I recommend that virtually all startups start with the Lifestyle runway:
If you start with Lifestyle, you can always change your mind and seek investors. If you start with Investment, it is almost impossible to go back.
In other words, if you take $500,000 in investment, you can’t just decide that you are big enough and want to enjoy life a bit. Growth is imperative once you take people’s money. The only way you get off that train is if you give everyone the returns they want.
The Other Reason…
The second reason I recommend lifestyle businesses is because it changes your mindset to focus on revenue. If you have read my other articles, you can tell I am a pretty big fan of this strategy. Focusing on revenue is a good way to start just about any venture. If your company has a short, self-funded runway, then you have to start thinking about this pretty quickly and that is, often, a good thing.
The Real World: HQ vs WeWork
In my neck of the woods (Raleigh, NC) co-working is HAWT. Over the last 6 or so years the concept of a place to work that was cheap and trendy has really taken off. This is not unlike… ya know… everywhere. To fill this need in the Raleigh/Durham area, around 10 different co-working companies have come (and often gone).
One of the oldest in the area is called HQ Raleigh (which just happens to be where our office is). Comparing HQ to the 8,000 lb gorilla in co-working, WeWork, is a good example of Lifestyle vs. Investment.
HQ began as a join venture between four luminaries in the Raleigh Tech space: Jason Widen (serial entrepreneur), Christopher Gergen (author and investor), Brooks Belle (founder, brooksbell.com), and Jesse Lipson (started/sold ShareFile) in 2013 because they could see this trend exploding and thought it was high time Raleigh got in on the action.
HQ used the Lifestyle runway in that the founders took very little outside investment (early on they had a couple of small corporate sponsors) to get started. Now six years later they have 4 different locations around town with over 100,000 square feet of space and they are not only self-sustaining, but they have recently become profitable for the first time (woot).
No one is getting rich (yet) off of this venture, but they employ several people full time and they are serving a critical need in the area.
WeWork is the same concept but blown up to a ridiculous size and scale. Their founder Adam Neumann recognized very early (2010) that co-working was a thing.
Nine years later here is the tale of the tape:
- $13 billion raised.
- Current valuation: $47 billion (although some argue that it should be a lot lower than that).
- Manages over 200 million(!!) square feet and 400,000 members.
- Lost $2 billion in 2018.
Both companies serve the same purpose, but came at it in VERY different ways. One is profitable now, one is still bleeding money. One is tiny, the other is a monster.
When you are deciding which way you want your company to go these two can serve as a good example for each runway model (see what I did there?).
If the world was your oyster, which company would you rather be running?