Lifestyle Companies - The Scourge of VC Portfolios
In a moment of weakness marketing guru Seth Godin muses that "So, what's wrong with small business?". In VC culture, stable no growth companies - or lifestyle companies - are disaster investments little better than bankruptcies.
Barings Bank observed in a recent review of startup investments that 20% of companies developed into substantial profitable businesses, 20% failed and lost all equity, and 60% drifted sideways often regressing to life-style businesses for a small group of owner-managers.
The fact is that an investor, bank or VC fund, does not inject money into a business to improve the founders life-style and status. A VC fund usually has a 5 to 7 year window in which to realize the value of their investment. Investors want growth, preferably in multiples of 10. Life-style companies clutter up a portfolio, and require investors to negotiate a buy-out with managers. Not quite bankruptcy, but not much better.
However, ultra-growth comes at a price always. No pain, no gain. Or in financial notation, no volatility - no return. Startup owners have to suffer through extreme risk and volatility in order to accomplish growth. Life is easier and safer for the small business owner, happy with his place in the status quo.
But is safe not risky ? With increasingly dynamic markets, globalization, a stable life-style company can have some nasty surprises as competitors, with greater economies of scale, descend on its little niche. Everybody has to acquire an appetite for change, either gradual or in big lumps. Small companies are not what they used to be.
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