Often new entrepreneurs label their business as a startup whereas many are what we call a lifestyle business. Does it matter? Well, yes because understanding the difference between the two helps make a better decision regarding the legal framework for your business. Simply put, a lifestyle business is formed to provide a sustainable source of income to its owners and these businesses typically have a gradual growth plan. Unlike startups, these businesses are not formed to disrupt the market or grow rapidly. In contrast, a startup usually involves a new idea or a new spin on an existing idea, and startup entrepreneurs want to achieve rapid growth and scalability. Investopedia defines startups, as a “a company in the first stages of operations. Startups are founded by one or more entrepreneurs who want to develop a product or service for which they believe there is demand. These companies generally start with high costs and limited revenue, which is why they look for capital from a variety of sources such as venture capitalists.”
However, in the very beginning of their lifecycles, there is not much difference between a lifestyle business and a startup—both start with an idea, involve a single or a few founders, require a plan for growth, and both need labor and capital to grow. But as a company grows, its trajectory can be different depending on whether it is a lifestyle business or a startup. A few key differences generally observed between both are:
A startup typically plans to achieve exponential growth while a lifestyle business is focused on linear growth. A startup entrepreneur is not focused on a sustainable source of income but on growing the company quickly to make a considerable profit in an “exit” – that is selling the business or going public within a few years of formation.
A lifestyle business is typically funded by its owners, or through small loans from family and friends (we will explore in a later blog the pros and cons of raising capital in exchange for ownership equity from family and friends), or via business loans. During the early stages, a startup may rely on similar funding but as it grows it generally seeks angel and VC-backed financing and these investments are critical to achieve rapid growth and scalability. Startups also typically need several rounds of financing and rely on several sources of capital at different stages of its lifecycle.
Because lifestyle businesses are formed to provide a source of income to its owners, they are focused on income generation for the owners while maintaining incremental growth. Not that lifestyle businesses cannot be very profitable, but they typically take a less aggressive approach to growth compared to startups. Startups are more focused on growth than achieving profitability during the first several years. Startup owners’ and investors’ expectation is to achieve a favorable return on their investment at the time of “exit” rather than during the first few years of the company’s growth.
Ownership and control typically remains with the owners in a lifestyle business. In contrast, startups have more complex ownership structures and may require multiple forms of stock. Also, it is more common for startups to use equity incentive to hire competent professionals to come work for the company.
A lifestyle business is usually formed to operate for an indefinite period (typically until the owners retire) while a startup is focused on “exit” either through a sale of the business or an initial public offering.
It is worthwhile to consider your goals for your business and whether it fits in the category of a lifestyle business or a startup in deciding the structure and legal framework for it.