Listening to Season 2 of NPR’s “Startup” podcast series, I was intrigued. [SPOILER ALERT] Emma Kessler and Lauren Kay, co-founders of Dating Ring, ultimately come to the difficult decision of pivoting their promising startup into a “lifestyle business.”
Here is a Y Combinator backed early stage startup that had received a ton of press (they gained notoriety for flying single women from NYC to meet single men in SF and signed up for “Startup” to get more coverage) and raised nearly half a million dollars in a few months. But then user acquisition flattens, fundraising stalls, and arguments about equity and roles ensue. They’re lucky enough to get a relatively happy ending with the co-founders agreeing on the decision to become a lifestyle business
This raised an interesting question for me, personally. I’m working on a trivia-based board game with a co-founder. We have a terrifically fun product, but we know that the board game industry has very few explosive hits. Neither of us expect our company to become the next Cards Against Humanity (although we wouldn’t mind if it did).
So how do you design a company that allows you to ‘fail gracefully’ into a lifestyle business?
- Make sure you and your co-founder have similar (realistic!) perspectives
If you suspect that your co-founder is expecting this side project to become a multi-million dollar venture whereas you’re happy the extra few grand a month in your bank account…STOP reading this post and go find your co-founder. You’re avoiding a difficult conversation that’s only going to get more challenging over time.
Maybe the solution will be to design a series of experiments that demonstrate the amount of consumer demand your product can pull. Maybe it’s setting milestones for customer acquisition, revenue, and profit targets. And if the two of you still can’t agree on whether you want to join the Unicorn Club, maybe it’s time to get a different co-founder.
- Think revenue first, fundraising later.
It might be the best time for any kind of business in any industry to raise money for all of history, like since the time of the ancient Egyptians — Stewart Butterfield, CEO of Slack
This may seem obvious, but I’m going to spell it out: Just because it’s easy to get VC money these days, doesn’t mean you should.
Think about those jumbo-sized mortgage loans banks were handing out like candy in 2006. Do you truly understand all of the strings that come with angel or VC-backed investment? Is your vision of the company’s future revenues in line with that of your investors’? And being fair to those investors, can they reasonably expect a 10-50x return on your company?
If the answers to these questions are no, then consider alternative sources of capital: crowdfunding if you have a tangible product or working capital loans like those offered by BetaSpring’s “Rev Up” Accelerator.
But keep in mind, the only way you’ll keep your lifestyle business alive is if your business model includes a steady revenue stream and a clear, preferably quick, path to profitability.
- Know what your exit options are, and which one you want
Do you plan on running this business until you can pass it to your children? Are you hoping to cash out in a few years to a large competitor? How will you position it to be an attractive acquisition target? Or is there a core asset or technology that you can license and just watch the royalties flow in?One area that I don’t think Kay or Tessler considered enough during the “Startup” podcast series is what their exit options would be. Dating companies (Tinder aside) are a hard sell for VCs for a variety of factors, so other than acquisition by IAC (owner of Match.com, OKCupid, and most other major sites), what was their play when they were still trying to join the Unicorn Club?Even now, as a lifestyle business with slower growth ambitions, Dating Ring’s revenue model requires time and labor intensive work done by human matchmakers rather than an easily scaled technology. This business is never going to simply “run itself.” Will Dating Ring remain Kay and Tessler’s fulltime jobs or are they planning to transition to a hired manager?
This may not be a foolproof recipe, but being aligned with your cofounder, being smart about your money, and setting your sights on a clear exit can give a startup with healthy (though not limitless) potential the chance to stay alive as a passionate, profit-generating business.