Lifestyle or buildup? How to Choose the Right Type of Business for your Entrepreneurial Dreams

Dheera Venkatraman/Flickr

So, you’ve decided to start a company. Good for you. It’s a challenge, but you’re up to the task. The first decision you’ll have to make as an entrepreneur is what type of business you want to start:

1. Lifestyle
2. Buildup

While not the only type of companies that people start, these are the two main types of independent company new entrepreneurs start. (But, you may also want to look into franchising, which many new entrepreneurs also get into.)

Let’s take a look at the pros and cons of each type of business and see which one is best suited to your situation.

Lifestyle Companies

Lifestyle companies are businesses run by people who are passionate about something and want to be in a particular industry because they find joy in it and it fits in with their lifestyle. The goal isn’t to grow the business (although growth to a certain point is good).

Rather, the goal is to have a business that provides the owner with liveable income for the type of lifestyle they want and provides the business owner with a job for the rest of their working lives that they love doing.

The exit strategy for lifestyle companies is often just to close up shop and sell assets when the owners don’t want to do it anymore. Sometimes the business can be passed onto children or someone else who wants to get into the same industry and have a headstart with an established business.

Your business idea may be a lifestyle company idea if you’ve been dreaming about it for years and when you talk about it you say:

“You know, I’ve always wanted to open a little …”

Some examples of lifestyle companies:

• Small, independent shops like cafes, bookstores or scuba diving tours.
• Niche retailers or service providers like a comic book store or a small dog waste cleaning service.
• Niche product manufacturers like an independent organic dog food company.

Let’s go through some of the pros and cons of starting one of these companies:

Pros

Little pressure to grow

That’s not so say that growth can be completely ignored, but once you have your business established, it’s not a top priority to gain market share or open a new location. You mostly have to be wary about upcoming threats.

For example, if you open a little neighbourhood cafe, you have to grow to a point where you are attracting enough customers to be profitable, but you’re not out to compete with Starbucks for market share in your city. However, a Starbucks opening two blocks from you will need to be addressed in some way.

You get to be in an industry that interests you.

People don’t start lifestyle companies in industries that they’re not passionate about because the passion is the driving force behind them. So, you get to enjoy being involved in an industry that you want to be in.

Cons:

Limited resources

Lifestyle companies tend to stay small, which can lead to struggles when you hit rough patches. You don’t have the resources of a large corporation at your disposal to ride out market fluctuations easily and take big losses if necessary.

Going back to our cafe example, if a Starbucks did open two blocks from you, you’d have to do something to address that threat, like increase your marketing. But, your marketing budget is probably going to be fairly small, which means you won’t be able to throw a lot into fighting against that threat. That’s not to say you can’t do it, but you’ll likely need to be more creative and establish a strong brand position based on being a small, local business.

Potential burnout

While getting into an industry that you love sounds great, one of the potential drawbacks is that you might eventually come to hate it. This is especially possible if you haven’t set your business up to run without you. If you have to be involved in it every single day, it could lead to resentment.

Procuring funding may be difficult.

Investors generally don’t put money into lifestyle businesses because there is no clear way for them to get their investment back with profit. You might be able to get funding from somewhere, but it could be a hard sell.

Because lifestyle businesses usually don’t bring in huge amounts of money, as mentioned previously, the exit strategies don’t really net much for anyone involved. Often, it will just be to close down and get what you can for the equipment, etc. that the business owns.

Buildup Companies

On the other proverbial hand, you have buildup companies. These companies are meant to change an industry and create value for the business founders and any investors they attract by having a definitive exit strategy. Usually, the exit strategy will be to sell the company to a larger player in the industry, but taking it public is another way to do that.

For buildup companies, the key word is “growth.” The founders’ aim is to grow the company so it becomes valuable enough to attract a big fish to purchase it and give investors’ wallets a severe case of obesity in the process.

These companies often start from people seeing a gap in a market that they can fill and having an epiphany for a business idea.

Your business idea may be a buildup company idea if the idea “hits” you and you find yourself saying:

“Why isn’t there a company that …?”

Some examples of lifestyle companies:

• A technology company that has created a software to counteract the effect of hand tremors while holding a phone. (Founder saw an opportunity in the market and is hoping one of the large phone manufacturers or a larger software company eventually buys the business.)
• A business that sells drug and health testing kits online. The founder saw a niche to get into and grows the business to the point where it is highly profitable and hopes a larger company with an interest in that market takes notice and purchases the business.
• Any business that can be grown and attract investors. Often, they will only sell one product or service and perfect that offering to make it as profitable as possible to draw in a buyer for the business. (If they become successful enough without being purchased, they sometimes will go public and thus give investors a return on their money.)

So, let’s look at the pros and cons of starting one of these companies.

Pros

Profit potential

This is what draws in founders and investors alike. If you can identify a gap in the market that is not being filled at the right time and you build your company intelligently, you can net a fat profit.

Burnout avoidance

Starting any company obviously takes a lot of work, but one of the advantages about starting a buildup company is that part of the point is to get it to where you don’t have to be in the day-to-day running of it and can avoid the potential for burnout.

Because you want to sell it at some point, you can concentrate on growing it and getting it off your hands so you can either retire or move onto other projects. That’s not to say you’ll be able to do that within a year or two. You are still looking at being in the business for several years, but you’ll be hiring a team around you and hopefully won’t have to spend all of your time in the day-to-day operations of the business once you have a competent team in place. (You then get to spend your time chasing down funding.)

Easier funding

Again, this is not to say attracting investors is easy, but if angel investors or banks see potential with your company, they will be willing to take a chance on it and help you grow it with funding or mentorship or both.

Cons:

Burnout

Wait, what?

Yes, you may avoid one type of burnout, but you still might feel frazzled by a buildup company. Since the point of these businesses is growth growth growth, it can get a bit weary doing all you can to make the business as profitable as possible, push your market share and constantly attract new customers. It can especially weigh on you if the company isn’t growing at the rate you thought it would.

Lack of passion

Buildup companies aren’t usually started out of a passionate drive to be in an industry (although they can be). Often, it has more to do with someone jumping on an opportunity in an industry that they are frustrated with or that they just happen to stumble upon in some other way.

With our drug testing company from the examples, the founder may have seen an underserved market and got into it because they knew this niche could be lucrative, but five or seven years on, if they don’t have a passion for drug and health testing and the business isn’t growing as quickly as they had hoped, it could be tough to maintain enthusiasm.

Lack of skills

While you can sort of get away with “learning on the job” with a smaller lifestyle company, to found and grow a buildup company that angel investors are going to take an interest in and a larger corporation is going to eventually buy takes a certain level of business acumen and competent leadership.

At the very least, you have to be able to find and hire the right team as you grow. For people who are completely green to business, starting and growing a buildup company can be a bit daunting.

So, which one is for you?

It depends.

If you are looking to have a small business in an industry you love and are passionate about that will provide you with a steady, if modest, income, then you are probably looking to open a lifestyle business.

If you had one of those “light bulb moments” where you spotted an obvious gap in a market and knew that a business that filled that gap could make a killing, then you’re probably looking to start a buildup company that you can grow and sell (or potentially take public) for said killing.

If you do it right, identifying a gap in the market and getting a buildup company together and growing it relatively quickly can lead to rapid success. If you just want to turn one of your hobbies into a business, it can lead to a lifetime of fulfillment in a job you love.

For some, they are lucky enough to get the best of both worlds. Someone might start making their own organic dog food treats at home as a lifestyle company because they’re passionate about dogs and have their business get picked up by a larger pet brand looking to get into the organic dog food market.

No matter which path you choose, entrepreneurialism can lead you to fulfillment and happiness. Choose wisely and good luck on your journey.