In our last discussion [“The Name Game,” Upstate Business Journal, March 31, 2017], I examined the difference between an entrepreneur and a small businessperson. Let’s change our perspective to the ventures or companies that they create.
Again, I will develop two archetypes: the gazelle venture and the lifestyle company.
Investopedia defines a gazelle venture as “a high-growth company that is increasing its revenues by at least 20 percent annually for four years or more, starting from a revenue base of at least $1 million. This growth pace means that the company has effectively doubled its revenues over a four-year period. As gazelle companies are characterized by their rapid growth pace, rather than their absolute size, they can range in size from small companies to very large enterprises.”
Wikipedia defines a lifestyle company as “a business set up and run by its founders primarily with the aim of sustaining a particular level of income and no more; or to provide a foundation from which to enjoy a particular lifestyle.”
A gazelle venture is investable. High-net-worth individuals (when acting alone, they are called “angels”) purchase equity in these ventures with the unenforceable expectation that they will receive multiple times this investment in return at some time in the indeterminate future. The investor expects the future value of the venture to increase multifold.
A lifestyle company is loanable. Commercial banks provide capital in the form of debt with the legally enforceable expectation that they will receive a modest return in the form of interest and the principal returned in a specific period of three to five years. The banker focuses on the owner’s ability to pay the commitments of the loan from business income and personal or business assets held in the form of collateral.
A gazelle venture is high growth. For a venture to be worth five or 10 times its value requires lots of growth, both top line and bottom line. A lifestyle company does not need to grow quickly to satisfy the needs of the owners. Moderate growth (10-15 percent) is a good thing, like the feeling of wind in your sails. Growing a business at a faster rate is expensive and hard work, similar to navigating through gale force winds.
A gazelle venture is scalable. To grow fast requires that the business can scale — significantly grow revenue (top line) without equally increasing cost (bottom line). The venture must be able to move beyond its founders. This is accomplished through process and a replicable business model. A lifestyle company is closely tied to and dependent on its owners.
A gazelle venture often has defendable intellectual property. Many scalable business models depend on some “secret sauce” to provide a barrier to entry from competitors. The KISS (Keep It Simple) principle generally applies to a lifestyle company. Complexity gets in the way. Lifestyle owners compete on reputation, personal service, and individual shrewdness.
A gazelle venture has an exit strategy — how else do you provide a return to the investors? Why would a successful owner sell a lifestyle company that is providing for his lifestyle? He may pass it on to a family member or sell it at retirement, but this is not the objective.
In a gazelle venture, the founders “swing for the fences,” targeting a big outcome (harvest or exit) with a low probability of success. They do it for the investors (including themselves) with the end as the goal. The definition of success for a lifestyle company is different. The owners call all of the shots with the goal of providing a great quality of life for themselves. The journey is what it is all about.
What differences do you see? Send them to email@example.com.