After twenty-five years as an entrepreneur in economic development, I’ve found one overwhelming misunderstanding of the nature of startup companies. Most people fail to realize the difference between “lifestyle” and “scalable” businesses.
While the term “lifestyle” seems to conjure up the vision of a mom and pop business like a flower shop or café, the specific type of business is generally not the central defining factor. Rather, the purpose of the business tends to segregate the definition.
The guiding principle behind a Lifestyle business:
is to create and sustain a particular level of income for the founders or owners, nothing more. In other words, its purpose is to facilitate a particular lifestyle.
This does not mean that lifestyle businesses can’t be significant. Such companies can easily be multi-million dollar companies in terms of revenue or equity. However, they tend to be self-limiting in their ability to expand. Overwhelmingly, they tend to be focused on one or more key persons, the loss of whom will stop the company in its tracks.
While this is also true of most startup companies in their early stages, a lifestyle company never overcomes that limitation. In fact, Generally, this means that such companies have a difficult time surviving its original owners.
Scalable businesses not only have the potential to move beyond their founders,
its fundamental rationale is to do so. They have the ability to replicate and expand unconstrained substantively by the limitations of any single individual. This is what a scalable company is structured to do.
The one key component that differentiates lifestyle from scalable businesses is process. In order to transcend the individual, an organization must have practices and procedures that allow actions to reoccur without ongoing direct supervision. This does not obviate the need for leadership, but it does allow for management to occur, meaning the efficient allocation of resources (including people) to accomplish set objectives.
A process can apply to personnel actions or machine activities. For example, a process may include computerized machine actions combined, as well as, scripted human activity. In order to coordinate disparate activities within the business, the leadership must set and prioritized objectives. A company may develop specific processes that make their company unique. In fact, the entire idea behind a startup may be an exclusive, new, or more efficient way to accomplish something.
Often, the defining characteristic of a scalable company is the ability to replicate, create multiple copies of a similar product or service without substantive modification rather than “one-of-a-kind” items. This can lead to decreasing marginal costs where, as production increases, the resources needed to make the next item or provide the next increment of service go down.
Finally, the ability to get funding is distinctly different for the two categories of business.
Typically, a lifestyle business relies on debt (bank) financing. Because of the way they were structured, they generally are not good candidates for equity investment. In contrast, truly scalable companies focus on angel or venture financing in order to grow. This is possible because they were fundamentally structured correctly from the outset. The information, resources, and tools in this website are specifically designed to help startup businesses through this process.