Lifestyle Companies - The Scourge of VC Portfolios
Posted under Entrepreneur , Technology Investment

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.

Comments

This is something that a few of us - content prodcuers and techies - have been discussing lately on my blog. I hate to connect out in a comment but we'd really welcome your involvement: http://www.mediangler.com/2006/10/03/can-we-make-fundersvcs-more-realistic/
We don't see the world, or profitability, as being that volatile. The opposite in fact. There are safer paths to attractive exists for you guys. Our argumetn would be you don't udnerstand the content world well enough so - we need to be talking.

Haydn,

I applaude your critique of short termism, and could not agree more. Long term views like yours are unfortunately unusual, and hard for VCs.

Eucap is a holding, not a VC, where the partners look for synergy over many years, as we proved with our internet buyouts in 2002.

We do undertake small exploratory investments, that eventually morph into successful services as the team acquires the domain expertise you mention. The investments have always been internal, with a permanent innovation team trying things out, but I will be looking to seed external teams in the near future. I will certainly appreciate your help when the time comes.

Every return or profit carries some risk. The higher the return, greater the risk. And business which calculate the risk are likely to grow. Now extensive research is required to calculate the risk. I think statisticians play important role in calculating the risk because they master at statistical techniques which help calculate risk. They are the good managers of the risk.

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