13 Types of Young Companies – Which Are You?

Young African animals

I wrote a ranting blog post early on called “Neither A Lifestyle Business Nor A Startup Be.” My beef is with the dominant media conversation that asserts venture capital backed startups are morally superior to every other kind of business launched, which are all lumped together and called either a “lifestyle business” or a “small business.”

This bipolar categorization is not supported by data about the real world.

  • More businesses grow revenue fast without venture capital than with venture capital. A 1989 study noted that 80% of the INC 500 had no venture capital before getting on this list of the fastest growing private companies in the US. I’m researching the INC 5000 to update this study. So far the 2017 data generally supports the 1989 study.
  • Venture capital startups fail more often than other young businesses. While these numbers aren’t exactly apples to apples, about 90% of venture capital investments are “failures,” while 50% of all new businesses survive to year five, and fail at an even slower rate after that.

As I’ve dug deeper into the companies on the INC 5000 list, my views on fast-growing “significant” companies have become even more nuanced. And I’ve become more convinced that there is an alternative pathway called Real Business that should be taught alongside other choices for starting a company.

The Diverse Young Business Ecosystem

Like any natural ecosystem such as the African savanna or even the desert, the young company ecosystem is extremely diverse. I’ve counted at least 13 different “species” of young companies. Do any of these sound like your current approach? Or a company you know?

These first six are variations on “small” or “lifestyle” businesses.

  • Hobby Business – it enables a passion but likely doesn’t pay for itself
  • Side Hustle – it generates extra income on a part time basis
  • Solopreneur – it makes an income for the full time founder who never hires employees
  • Perennial Small Business – it makes “enough” income for the owners but stays within self-imposed limits
  • Lifestyle Business – the founders enjoy life through a modest “fun” business that makes “just enough” money to sustain the lifestyle
  • Ego Business – funded by family wealth, the founder spends and poses as a business owner to support their self image, usually at a financial loss.

There are also a bunch of ways to build a substantial business and/or make a lot of money. I’ve noticed these from looking in detail at about 1,000 of the INC 5000 list in 2017, as well as from a career of listening to more than 2,000 fundraising pitches as a VC and an angel investor. These high aspiration business choices include:

  • Disruptive Startup has a hyperbolic-growth-or-die trajectory and includes most of the venture capital and many of the angel investor backed companies
  • Real Business targets profit, positive cash flow and revenue growth derived from differentiated products and services
  • Burger is looking for a “quick flip,” meaning a quick sale to a big buyer, and is usually a tech startup
  • Roll-Up buys and consolidates (“rolls up”) lots of companies in a fractured industry, usually funded with private equity and associated debt
  • Real Estate and other asset appreciation businesses can grow large with lots of debt
  • Sales Machine sells other people’s stuff through hardball sales tactics
  • Multi-Level Marketing (MLM) rapidly attracts a pyramid of individual sales people, so it’s sometimes a Sales Machine married to a Ponzi Scheme.

Real Businesses

I’m going to focus the rest of this post on the sector I’m calling Real Businesses, one of the 13 species of young companies. In fact, I’m going to be focusing many of the future posts of Four Colors of Money for Entrepreneurs on helping Real Businesses launch and grow.

The reason? I had a gut feeling over the last seven years that there was something missing from the conversation about entrepreneurship. It’s been growing stronger as I’ve launched this site.

It all came together recently when I stumbled across Indie.vc, a contrarian Silicon Valley funding organization with deep tech roots. One of the Indie.vc partners is Tim O’Reilly. I recently received his book WTF as a gift from one of my daughters.

I like contrarians. I’ve always thought going against conventional wisdom was a good way to make money.

The Indie.vc guys were into seed investing before it was cool. But they’ve made a major pivot recently because seed investing became way too cool, and thus harder to make money in as an investor.

Here’s how they describe their new focus as of 2017:

Real businesses make products and sell them for a profit. They focus on customers, revenue and profitability not investors, valuations and the next fundable milestone. Real businesses prioritize their customer’s needs over their customer’s eyeballs. They have a functioning business model, not a believable financial model. Real businesses want to stay in business, not run for the exit. They create their own source of funding and don’t have to ask anyone for permission to exist. We believe real businesses make really great investments.

In other words, Real Businesses are their own thing, separate from Silicon Valley startups on the one hand, and true lifestyle businesses on the other hand.

There are many different ways to fund the launch of a Real Business. These include bootstrapping (which includes rewards based crowdfunding), grants, and friends and family debt or equity.

The really important point, though, is that once you achieve positive cash flow your funding options to accelerate growth increase exponentially. Instead of searching for funding, the funders will find you. Really!

A cash flow positive business has removed much of the execution risk that equity investors worry most about. The larger you get, and the less you “need the money” to sustain current growth, the more they want to invest, and the more competitive investors will try to invest. Which puts you in a strong negotiating position!

And there are other non-dilutive forms of funding that open up as well including bank loans and revenue-based loans.

In other words, growing fast through equity investment is always an option for Real Businesses. It’s just not the only option.

And as an entrepreneur, I always like multiple options!

My goal is to help you get a bunch.

Don Gooding


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