Don’t Raise Capital for your Lifestyle Business
This afternoon I spoke with an entrepreneur who pivoted his mobile app into a services business. He had raised a small amount of seed capital — less than a hundred thousand dollars. Over the past few months he had generated several hundred thousand dollars in revenue from the service business — only slightly related to his original business idea. He was looking for capital to fund the expansion of the business and what became immediately apparent was that while his new business might be successful (I actually think it could be) it isn’t the sort of investment ANY early stage investor should consider making. It was a lifestyle business.
When we started Architel, a services company, back in 2001 we sold our first client (around $4,000 per month in revenue) and invested $20,000 of our own money to cover startup expenses. We hired our first employee and continued to scout for new clients. Month after month we’d bring on a new client and hire more employees as we could afford to bring them on board. Year after year the company grew. By 2003 Scott and I bought out our two original partners — we never raised outside capital or debt.
Architel was a classic lifestyle business. We used the profits from the company to fund our lives, our hobbies, and investments. Had we had outside investors we wouldn’t have been free to do so — we’d have to wait for years to realize any sort of gain from the company. Furthermore, we couldn’t have used the platform Architel provided to launch new ideas and companies. Owning a lifestyle business is a HUGE advantage for an entrepreneur — I highly recommend it.
My advice to the entrepreneur I spoke with was to offer to pay his investors back — to return the $100K or so in investment they made last year. Let them know that the original billion dollar mobile app business they planned was a bust. Explain your plan to build a lifestyle business — one that will provide you with a good income, but one that wouldn’t be a great investment for an early stage investor.