Module 10 Lesson 1 - Read

Read:  Founder’s Choice

Overview

Businesses come in all shapes and sizes. The following categories of business start-ups share some common characteristics around the goals of the owner(s), the potential of the business, the capital required to get started, and the level of innovation.

Categories

New ventures fall into one of three categories: lifestyle, income replacement, and high-growth businesses. A lifestyle business is intended to remain small and allows the owner to pursue a specific lifestyle while providing an income. Examples of a lifestyle business are a fishing guide service, classic car restorer, and interior designer. Owners of lifestyle businesses look at their self-employment as an income replacement business. They seek to earn at least as much income from their business to replace their salary as if they were working for someone else.

Another business category is a moderate potential business, intended to grow over years and even decades. These businesses may grow to hundreds of employees and grow in scope and complexity to the point where the founder is not needed daily. The owner may choose to stay involved in day-to-day operations or may let managers run the company while the owners enjoy passive income from the business in dividends or distributions, all while the value of the business grows. An example is an owner of five hotel properties, each with a general manager running a respective location.

A high-growth business is one in which the founders’ goal is to grow quickly, often using investors’ capital, to sell the company or take it public. Many high-growth companies involve technology. Examples are software, social media, and biomedical companies.

One factor that helps identify the company category is its potential. Lifestyle businesses do not scale well and will support the owner with a steady income and a few paid employees. Moderate potential businesses can grow over time with additional locations and employees. While they may never be billion-dollar businesses, they can grow to tens of millions of dollars per year in revenue. These businesses provide more to the owner than a steady income. They become an asset that can be sold when the owner is ready to retire or focus on a different project. High-growth businesses have the largest financial potential. Though risky, a successful high-growth business can disrupt an entire industry landscape and generate billions in revenue, creating substantial wealth for owners and investors.

While high-growth businesses gain media attention, there is not a “best” category of business startups. Different founders have different goals, networks, and resources. A lifestyle business owner can be more fulfilled with their endeavor than the founder of a fast-growing tech firm featured on the cover of a business magazine. The majority of businesses are neither high growth nor high tech firms.

Growth vs. Scaling

Many companies seek to grow by adding customers, adding to their product line, and becoming more competitive. This incremental growth results in linear growth of a few percentage points each year, showing the business’s expansion. This slow growth is typical of lifestyle and moderate potential businesses.

Scaling involves substantial growth in a short time without a significant increase in required resources. This sometimes involves employees. This rapid growth involves automation, technology, and the implementation of systems. Facebook, for example, launched in early 2004 and had one million users by December of that year. In 2010, it had over 500 million users. In 2020, Facebook had 2.7 billion users. This exponential growth is an extreme example of scaling and is the goal of high-growth companies. This explosive growth and, in turn, revenues, results in a higher valuation for the company so that when the company goes public or is sold, the founders and investors are rewarded by earning many times their initial investment. It is the idea of turning $1 million into $10 million, or more, in a few years.

Some business models scale better than others. For example, a financial planner who meets clients in person is limited by the number of appointments he can make each day. However, if that same financial planner reaches his clients through books, videos, and online courses, the business can scale to a larger enterprise.

Start-up Requirements

Different categories of start-ups vary in the amount and sources of funding. While there are exceptions, lifestyle businesses require less than $100,000 in start-up costs. Those costs are often provided by the owner’s savings. Other sources may include money from family and friends or a bank loan. Since lifestyle businesses are not designed to grow quickly, outside investors are typically not interested in funding them.

Moderate potential businesses may be started for less than $100,000 but may require more. Funding sources include personal savings, SBA loans, and angel investors, wealthy individuals who provide financial backing for start-up companies in exchange for a percentage of company ownership.

High-growth businesses need higher funding levels in the range of $1 million or more. Angel investors and venture capital funds are the sources of these companies’ funds. A venture capital fund is a money pool from investors that seeks to invest in small companies with high growth potential in exchange for ownership or equity stake in those companies.

 

Expand: What about Innovation?

Some equate entrepreneurship with innovation. While innovation is not required to be an entrepreneur, many successful companies increase their competitive edge through innovative products and practices. 

Innovation levels

One factor in describing categories of businesses is their level of innovativeness. They can be viewed at one of three levels: non-innovative, innovative, and revolutionary. On this spectrum of innovativeness, lifestyle companies tend toward the non-innovative end while high-growth companies are more likely to be revolutionary. Moderate potential companies fall in the middle, though there are exceptions.

Non-innovative companies make small, incremental changes. These changes sustain the company rather than contribute to its growth. Examples of these non-innovative, incremental changes are adding additional colors or sizes, increasing battery life, or adding a new flavor of ice cream or soft drink. These changes require little cost, but they provide only a small return on investment.

Innovative companies look for changes that are new to that industry or market. For example, drive-through windows began in the banking industry and became an innovative feature when restaurants added drive-through services.

Innovative changes require more investment than incremental changes but promise more growth for the company if successful. These changes include new features, materials, processes, or business models. An example of innovation in business models is the company Salesforce. In the past, software was sold as a single transaction. The customer bought one copy or license of the software and installed it on their computer. Salesforce, and other companies, introduced the idea of software as a service, where the customer pays for the web-based software as a yearly subscription, entitling the user to automated updates.

Innovative companies look to an adjacent market to grow the company. Under Armour started by making shirts for male football players and expanded its product line and customer base to include women and non-athletes.

Revolutionary innovation involves transformational changes that are new to a given market and everyone. These disruptive changes can alter an entire industry. Revolutionary changes are expensive and risky but can create massive financial success. Examples of revolutionary innovation include companies like Apple with its iPod and iPhone and Virgin Galactic, a space tourism company.

The more people are introduced to a new product or practice, the more innovative it is considered. Non-innovative companies make changes that are “new to us.” Other companies have done something similar, but it is new for this company. Innovative companies introduce changes that are “new to the market.” Revolutionary innovators bring about change that is “new to the world.”

 

Module 10 Lesson 1 of 5