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Choosing the Lifestyle Exit

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Setting up a company that can fail gracefully into a side business

dating-ring-foundersListening 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?

  1. 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.

  2. 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.

  3. 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.

4 thoughts on “Choosing the Lifestyle Exit

  1. Upasana – thanks for the blog post! I feel like a lifestyle business is something that entrepreneurs (especially entrepreneurs who are used to hearing about $1B+ valuations and rollercoaster-like startup life) rarely consider as a viable opportunity.

    As I was reading your post, I was struggling with how to think about timing. For example, you (or your co-founders’) perspective on how big you want your company to be is something that will most likely change over time. I’d argue that most entrepreneurs truly believe that their company is going to be HUGE (most entrepreneurs probably get that their pitch deck is an exaggeration, but believe it’s not by much!). And on a similar note, a company that is aiming for incredible growth may focus on fundraising and customers first, and revenue/profitability later. They may only re-prioritize once they make the decision to become a lifestyle business.

    So in that case, *when* should you make the decision on whether to switch to a lifestyle business? At the founding of the company? When your only other options are pivot or perish? Somewhere in between?

    Of course, the answer is “it depends”. Like you’ve mentioned, industry, personality, preferences, and business model all affect both *when* you make the decision as well as the outcome of the decision itself. Either way, it’s a conversation you would want to have on a continuous basis with all your stakeholders, especially your other co-founders.

  2. It’s absolutely important to have alignment with your cofounder on what type of business you’re building. It’s hard to pursue both a lifestyle business and a venture business at the same time. The next steps and milestones look different for each one. For a venture-backed business, not only do you have to pursue growth at the expense of cash flows (hopefully not at the expense of margins, though many companies do this now anyway), but you also have to focus on getting external funding sources to make growth possible in the face of high asset intensity. On the other hand, for a lifestyle business, margin arbitrage is important to achieve, and you can’t achieve it by simply getting more users.

  3. Excellent post, and I agree wholeheartedly there’s nothing wrong with creating a great lifestyle business.

    Your comment on the realistic perspective rings the most true to me, and is an area where I see many people make mistakes. From the outside looking at a business it’s frequently easy to tell certain businesses have limits on their potential/scale, but at least with my own friends, I have seen many delude themselves into ideas of grandeur that are totally unrealistic. I think part of this is due to the against-all-odds nature of entrepreneurship to begin with, but intentionally sticking your head in the sand and ignoring the problem is a horrible solution. Getting that realistic view is absolutely the most important thing.

    I also agree that once you have the realistic view, should you have a co-founder, it’s key to have aligned perspective there as well. I would, however, go a step further. While you and your co-founder may agree on the desired trajectory of the business today, desires change over time. It’s possible that down the road your goals will diverge, which could lead to problems. One suggestion that I have to avoid this potential: try to choose a co-founder with a similar risk tolerance as yourself. I’ve found that if there are radically different risk preferences, even with shared goals, problems can eventually arise. For instance, if one co-founder has a lot of personal wealth, and therefore is very risk tolerant, and another co-founder does not have the existing personal wealth, so is risk averse, things can go awry down the road as desires differ.

  4. This post brings up a very interesting exit option that I don’t think gets enough credit or consideration in the startup community. It is definitely important to be aligned with your cofounders at the beginning on the vision, and whether becoming a sustainable lifestyle business is an option, but I’m more interested in how such a transition can take place once you’ve accepted one or more rounds of funding.

    Investors are expecting a large return on their capital, and will probably also have board seats and rights. When you get to the point like “Startup” where growth and revenue have leveled off and it probably won’t be a huge success, how do you go through the process of transitioning the company into a lifestyle business? I imagine the investors will not want to stay involved, so what options do you have for letting them exit gracefully and reduce the pressure on your company to make moves such as pivoting or seeking an acquisition?

    I think this would be a very good topic to study in more detail. As an entrepreneur’s risk profile changes over time, the option to keep the business you spent years building in operation at some level must be enticing. I’m sure many entrepreneurs would not be satisfied and would want to start something else, but for many, this could be good middle option between another startup or returning to industry.

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