Working with early stage companies, or SoHo (Small Office / Home Office) operations, I have encountered many aspiring entrepreneurs who don’t really understand what investors want.
- A business is a repeatable, scalable way to transact for money. Almost always involves multiple employees. Early-stage investors know that most startups fail, so they need a portfolio of companies where the winners have have a shot at becoming huge. Easy scale is essential.
- A lifestyle business is a subset of “business” which for some reason can’t easily get huge, but may be able to earn a very comfortable living for one or several people. Founders sometimes see this label as an insult, but it’s not. Lifestyle businesses can be great, and some earn many millions. Just because something’s not suitable for investment doesn’t mean it isn’t desirable.
- A practice is when you sell your own time or services in a way that is uniquely you. Does not scale, because you are selling your own time and there will never be more than one of you. Raising your rates, or gaining new clients, does not count as “scaling”. One person’s hourly labor, even if it’s highly lucrative, may be a good lifestyle business but is not suitable for investment.
- A service business is a group of practices that work together. This tends to be less attractive to investors because it’s harder to scale than a product business. It’s also risky because of dependence upon the founders’ ability to recruit, train, and manage others. On the plus side, service businesses usually require little capital to begin. If you have 3 partners who do similar work, and you share systems for sales and accounting, then you might have the beginning of a scalable “service business” rather than a private practice. Could you add 10x or 100x the number of partners and have a larger business? Have you proven your business model can be repeated without reliance solely on your personal unique abilities?
- A startup is a funded business of less than two years which is not yet profitable but has reason to believe it is in the process of scaling. To qualify as “startup” rather than “project”, there must be meaningful financial investment. Let’s say, 6-figures of cash, not counting whatever salary the founders may forego. After 3 or 4 years a “startup” can be considered a business (even if it is still unprofitable), but only if its team members are drawing full-time salaries and there is meaningful growth. Otherwise, it may have failed and turned into a “hobby” (see below).
- A project is a hope for a future business which is still in development but is not yet making measurable progress towards being profitable. Progress must be quantifiable, such as “increasing membership by 10% each month” or “web traffic growing by 2x each year”. Cannot be “generally the same” over an extended time period, or else it’s more of a “hobby” (see below). Team members might be co-owners or paid in equity rather than cash.
- A hobby is an enjoyable activity that is not profitable, meaning that there is no outside investment, and the founder’s time and money spent on the business earns less than the founder’s living expenses.
Bonus Vocabulary
Marketing is the ongoing process of aligning an offering, its message, its audience, and the plan for how to reach them. The goal is to achieve and maintain a state where an increase in sales/advertising budget will cause a corresponding increase in revenue.
Sales is the process of actually “asking for the deal.” Compared with Marketing, it is more transactional than strategic.
