Deciding to start a company is the first step toward entrepreneurship for most people. But, you also have to decide what type of business you are going to start.
Here are two types of business first-time entrepreneurs generally start and the pros and cons of each. (Note that I’m only talking about independent companies here and not franchises.)
Lifestyle Companies
These businesses are set up and run by people who have a passion to be in a particular industry, who want to be their own boss and earn a decent income from their own business. Growth isn’t a huge priority for these companies. Doing something that you will love for the rest of your working life is the top priority.
Examples of lifestyle companies include:
- coffee houses or restaurants;
- niche retailers and service providers; and
- niche product manufacturers.
Pros:
There is little pressure to grow these companies. Obviously, they need to grow enough to be sustainable and make a profit, but once they’ve hit a comfortable level, they don’t need to constantly be thinking about getting bigger. They just need to address any threats in the market.
Another big pro about running a small lifestyle business is the fun of working in an industry you really want to be in.
Cons:
Since these businesses tend to stay small, it can be real struggle to keep them going through rough patches in the market. You don’t have the resources of a big company to ride out major fluctuations.
There’s also a real chance that you might suffer from burnout if you’re in an industry for a long time and you haven’t grown to the point where you can step away from the company and hire a competent team to run it.
A lifestyle business usually isn’t going to bring in massive amounts of revenue, so when it comes time to exit the business, they generally don’t sell for huge sums of money.
Build-Up Companies
Unlike a lifestyle company, a build-up company is not started to support an individual’s lifestyle, but to make a change in an industry or create value for the founders and shareholders with some sort of exit strategy in mind, preferably a sale of the company.
Growth is a priority for these companies and the ultimate goal would be to grow the company so it is valuable enough to be purchased by a larger corporation for a handsome profit.
Examples of buildup companies are:
Any type of business that can be grown. Usually, these companies will sell one type of product or offer one type of service for as long as they’re in business. They are often purchased by larger corporations and kept as a subsidiary of the purchasing corporation or they go public.
Pros:
If you’ve managed to identify a gap in the market and grow your business well, it could net you a handsome profit.
Burnout isn’t likely because build-up companies are meant to grow to the point where a founder can hire a team to run the company. If the business owners grow it properly, they won’t own it indefinitely, which will allow them to retire or move onto other projects.
Cons:
Since these businesses are started with the goal of eventually selling them or passing them along to family members, growth is always a key priority. This constant focus on getting bigger can get weary, especially if the company doesn’t grow quickly.
If the company isn’t in an industry the founder is particularly passionate about, it seems much more like work than if the founder was starting it purely out of a desire to get into that industry.
Growing a company quickly and efficiently enough to sell it for profit requires stellar leadership and business skills. If you are not a natural leader or you lack business acumen, it can be a real struggle getting this type of business to flourish.
Which one is for you?
Deciding which type of company would work better for you depends on whether you want to build something with the potential to provide you with some equity and establish a sort of legacy (build-up) or if you would rather have a modest income, but do something you love (lifestyle).
If you’ve identified a gap in a market that you feel confident you can exploit, getting a build-up company off the ground quickly can lead to relatively swift success. If you just want to turn one of your hobbies into a business, that can just as easily lead to a successful entrepreneurial career.
For the lucky ones, they will identify a gap in a market that they are truly passionate about and reap the benefits of both.