How a lifestyle business can offset the impact of lower investment returns and contribute to a more sustainable economy.
In this episode you’ll learn:
- What is a lifestyle business.
- How venture capital works.
- Why economic growth is slowing.
- Why slower economic growth means lower returns for stocks and bonds.
- How a lifestyle business can help offset lower investment returns.
Why Venture Capitalists Need Growth
Eighteen months ago, Alex Blumberg, a former public radio producer for “This American Life” and “Planet Money,” launched a podcast company called Gimlet Media. At the same time, he launched a podcast named “StartUp” where he documented the ups and downs of entrepreneurial life.
One of Blumberg’s investors in his new company is the venture capitalist Chris Saaca, who was also an early investor in Twitter and Uber.
In the finale of season one of Start Up (Episode 14), Alex shares the audio of a conversation he and Chris Saaca had about Blumberg’s progress as an entrepreneur.
Blumberg is feeling good about his company. Gimlet Media has booked one million dollars in advertising revenue, has twelve employees, and the company recently turned profitable.
Saaca is not pleased with the profitability part. “Getting cash flow positive is usually a bad move for an early stage company,” he says. “Everyone I know that is cash flow positive that early stops growing at the rate they should be growing and gets anchored by the idea they should keep making money. They no longer feel the freedom to take chances and spend the money they need be the size they need to be.”
Saaca goes on, “You’re not trying to build a little profitable lifestyle business. You’re trying to build a huge scale media company, which means you are likely to lose money for a long-time.”
Blumberg, sounding a little defeated, asks, “What is a lifestyle business?”
Saaca replies, “A lifestyle business is a business that is likely not growing or is growing at a really modest clip. It is making money so people working there are living comfortably. They are drawing reasonable salaries for their time. The pace is reasonable enough that they actually get to go on vacation.”
“A lifestyle business looks good to a lot of people,” says Blumberg.
“Not when you’re using my money,” replies Saaca. “You’ve signed up for the media empire building quest. You are Rupert Murdoch. You are going to need a 187-foot yacht before you are satisfied.”
Growing An Empire
Saaca’s point is venture capitalists don’t fund lifestyle business. They fund entrepreneurs who are obsessed with accomplishing a goal at any cost. The goal is not to just solve a particular need of the marketplace but to grow an empire. Given most startup companies fail, venture capitalist need their successful investments to grow into huge enterprises in order to provide the venture capitalists and their limited partners the targeted 15% to 20% internal rate of return for their entire portfolio that includes mostly losers and a few winners.
It’s not enough for Uber, one of Saaca’s investments, to be a successful app that coordinates freelance limousine drivers. To justify its huge valuation and to grow its revenue 200% to 300% per year indefinitely, Uber needs to evolve into a mammoth global automated transportation and delivery service complete with driverless cars and drones.
In the episode, Blumberg relates how Uber’s founder Travis Kalanick travels with a half-filled backpack and stays at hostels, despite his company’s $40 billion valuation. “He is a man on a mission.”
Blumberg, on the other hand, travels with “a full suitcase and toddler seats and carry-ons with sippy cups and board books.” He stays in “family suites in chain hotels with indoor pools.”
Blumberg says, “I want more than a lifestyle business, but I do have a lifestyle, or as my wife would call it, a life and a family that I love more than I will ever love my business.”
The IPO Market
The normal path for a successful venture capital investment is to hold an initial public stock offering (“IPO”) that raises capital in order for the venture capitalist and their limited partners to monetize their investment.
In order to justify the rich offering price for the IPO, companies that go public also have huge growth hurdles they are expected to meet in order to reward their new public shareholders.
Douglas Rushkoff in his book, “Throwing Rocks at the Google Bus: How Growth Became the Enemy of Prosperity,” writes about Twitter, one of Saaca’s most successful investments, that went public in 2013 and is currently struggling to meet investors’ expectations. Twitter’s stock now trades at more than 25% below its IPO price.
Ruskoff comments on Evan Williams, cofounder of Twitter, who made the front page of the “Wall Street Journal” the day after the IPO. The newspaper had printed the number $4.3 billion under Williams’ picture, indicating how much money he had personally made the day of the IPO.
Ruskoff writes, “Evan had disrupted journalism with the blog and news gathering with the tweet, but now he was surrendering all that disruption to the biggest, baddest industry of them all.”
“When you’re on the front page of the Wall Street Journal, receiving applause from all those guys in suits, it’s not usually because you’ve done something revolutionary; it’s because you helped confirm financial capital’s centrality to the whole scheme of human affairs.”
“Having taken this much new capital, Twitter now needs to produce. It must grow. In 2015, Twitter investors complained that the company was too far from reaching its “100x” growth potential and forced out the CEO.”
“It’s not that Twitter isn’t successful; it’s just not successful enough to justify all the money investors have pumped into it.”
“There was already enough revenue for employees to be happy, the users to be served, and even the original investors to be well compensated in an ongoing way. But there may never be enough to satisfy shareholders who expect to win back one hundred times their initial $20 billion bet. To do that, Twitter must grow into a corporation bigger than the economy of many nations. Isn’t that a bit much to ask of an app that sends out messages of 140 characters or less?”
Growth Isn’t The Only Path
The capital market ecosystem, which includes stocks and bonds, venture capitalists, investment bankers, brokerage firms and many other stakeholders, needs growth to survive.
But many private business—including lifestyle businesses—get along just fine worrying less about growth and focusing more on serving, helping, and connecting with their customers. Plus their owners get to take the occasional vacation.