Welcome to our discussion on types of enterprises.
Both in terms of enterprises commonly found, as well as the implications of the enterprise on your business and your lifestyle. What we’ll see is that the type of enterprise you choose should have a lot to do with your goals, both from a business and from a lifestyle point of view. When you think about the enterprise, there are three over-arching things to keep in mind; value creation, value distribution, and reach. Value creation is about how you create value through your day-to-day activities. Value distribution is seeing through distribution of wealth among all invested parties, and reach in about your ability to maximize your reach, reaching everything that you’d like to surf. Let’s take the barbershop for example. Here the owner of a barbershop is making something, or providing some something that lots of people want, which is providing the service to give lots of people haircuts. The issue, however, is reach. Can it actually reach and serve a large body of people? If you take apps on the other hand, Scalability is huge. You’re able to reach, and quickly reach, millions of people. However, are you developing an app that people actually want to pay for? What ends up happening is that most apps don’t actually make money. So as you think about the value you would like to create for your customers and your ability to reach these customers. You want to balance these business expectations with your personal goals. There are six types of enterprises that are most common. Each of these will have implications on your business expectations and your lifestyle. We will go through each of these in detail. These include the high growth, or venture backed business, lifestyle businesses, small businesses, entrepreneurship through acquisition, socially focused businesses, and large corporate-based businesses. First, let’s take a look at the venture-backed start up. This is a high growth enterprise that delivers large returns to founders and investors. If you think about business implications, these firms are often very small at birth, but they’re designed to become very large, very quickly. They’re often referred to as scalable start-ups, and they’re the typical Silicon Valley start-up model. In terms of financials, they usually depend on several rounds of angel, or venture capital investments and they’re expected to grow and grow rapidly. In terms of exits, these firms start out with an exit strategy as investors want a plan for getting their money back.
In terms of lifestyle, your personal life is often going to come second. There is a must girl mentality that overshadows other concerns.
This can put pressure on your personal situation, and your lifestyle may softer, or you may need to go on pause as you run this business. You need to be able to give it your all for business growth. An example of a venture back startup is Uber. Uber had massive investments from the venture capital community, and rapid growth was expected of them from the very get go. Next let’s talk about what is commonly called the lifestyle business, here your desired lifestyle is driving your business ambitions. In terms of business implications, founders have a clear view of what the end game is in terms of desired size. In terms of revenue or profit, for example. It’s usually funded by the founders themselves, or friends and family, and sometimes by a bank loan, but it probably does not involve formal private investors.
It will grow, however its intent is to grow to cover equity or debt costs, and the growth usually stops when founders achieve their desired lifestyle. In terms of exit, there’s usually no formal exit, but rather, founders run the business to allow their desired lifestyle.
Here, they usually have a healthy life-work balance, as the founders trade off higher growth for their lifestyle. I may involve some personal tradeoffs at moments or in the beginning, but usually it’s nothing unsustainable. A scuba shop in Hawaii is a great example of a lifestyle business. This allows an amateur marine naturalist to To combine her work, for example, with her love for the sea. While not generating a great deal of profit and having little growth potential, this entrepreneur has secured her opportunity to get wet every day, and spend time with people who share her passion for diving. Another example might be a small resort comprised of a dozen rental cabins near Aspen, Colorado, which permits a mountain enthusiast to hit the slopes on his snowboard several days a week during the winter, and fly fish for trout in the summer. Next, we have the organic growth business, where you’re running a stable and manageable operation.
Some of the business implications include founders who are usually focused on starting one shop, and not focused on high growth. In terms of financials, this is also usually funded by founders, or friends and family, and doesn’t usually involve a formal private investment in terms of growth. Again, here, we’re going to cover equity and debt costs, and we’re typically focused on providing, and not on wealth.
There may be no formal exit envisioned and founders run the business support their family and their lifestyle. In terms of lifestyle there’s usually a healthy life work balance although running a small business can also be highly stressful. It may involve long hours if the company has few employees. The main street farm is the quintessential small business. We find the Main Street Farm in every city in every country. It’s your neighborhood donut store or dim sum joint. It’s the landscape [INAUDIBLE] company with one [INAUDIBLE] or the Amish furniture manufacturer In individual, a family, or a couple of partners, typically own the Main Street firm. Although it may have bank loans and credit cards, as well as real estate, equipment and inventory financing, the Main Street firm rarely has outside investors. The goals of the Main Street firm are usually to maximize returns to the operators, rather than fund growth. They’re typically one location firms that have become fixtures in their communities. Next we have entrepreneurship by acquisition, where you’re buying an existing business. Here funders are looking for attractive businesses that are possibly under performing that they can buy and fund and run. The financing is usually done by founders, family and friends. Larger acquisitions may have larger private funding such as through private equity and in terms of growth. Growth is linked with the founder’s ambitions and the investors’ needs.
In terms of lifestyle, it’s highly dependant on exit, whether it’s run for cash or run for sale. If it’s run for cash, it can mean that a founder skips over initial and possibly stressful startup fees issues, but here due diligence is key. Just like when buying a house or a car, there are always things that you don’t know and you need to buy. You need to look under the hood and think about what skeletons are in the closet. An example of entrepreneurship by acquisition is buying a manufacturing firm. You’re buying an up and running business where you may have identified operational inefficiencies. Here, if you have the skill set, you can actually take these operational inefficiencies, and turn them into efficiencies, and generate more value for yourself. Next, we have social ventures, which are focused on social impact, but may also have a profit mission.
Here, founders are pursuing growth and profits in support of a broader social mission. The financials are usually through the founder First friends and family and in some cases Angel or Venture Capital investment. Growth expectations depend on the founders and investors, and exit is usually focused on achieving specific goals, such as achieving a social mission rather than a formal exit. Lifestyle implications depend heavily on the type of venture envisioned, and its reach and its funding. One example of a social venture is codopaxy, which is a bean core that’s meshing together a social mission with a financial mission. Finally we have corporate entrepreneurship, which is jump starting new growth from within a large enterprise. Here it’s usually started at the highest levels of a corporation, is largely funded by either the corporation in itself or a business unit.
In terms of growth, it is usually aimed at jump starting growth and entering a new or fast paced market that the parent company cannot enter easily. The purpose here is to establish new growth engines or assets for the parent company.
In terms of lifestyle, it would be directly linked with internal corporate objectives and business unit objectives. So as we’ve discussed, there are many different types of enterprises and the first question to ask yourself is what is your goal? Are you trying to build the next Google, Facebook or Zynga? In other words are you aiming for fast growth or you’re interested in being your own boss and keeping things simple. Are you interested in building substantial wealth, but not too much,
or maybe you don’t have an idea but you want to buy your way into the game, or perhaps you want to help others and finally. Perhaps you want to kick start new growth for an existing, usually larger organization. As we’ve seen it is important to be aware of how three things mesh together. The type of enterprise you pursue, the requirements to get your enterprise started, and your goals and desired lifestyle. Thanks for joining this session.