Apr 032011
 
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If you are starting or already have an early-stage business, you may have come up with an idea and just decided to go for it. While that works for some, I have found that it is always a good idea to get very clear in your head the objectives you have for a business, before you start it, or at the very least, before you try to grow it too much.

There’s probably an infinite number of categories of businesses you could create, particularly if you want to get very specific about the venture’s characteristics. Rather than try to take on the world here, we’re going to focus on five broader categories of businesses that I have found encompass the vast majority of companies out there.

1.) The first category is what I call Hobby Businesses. An example of a business that falls into this category would be one where you collect antique trains, so you decide to go into business buying and selling them. The beauty of a business like this is that typically you won’t lack for passion for the subject matter, as it’s something that you’re already willing to do in your spare time for free. Another positive about this type of business is that no matter how much time and resources you invest, within reason, with deference to your relationship with your family, you can hardly lose. You love the subject matter and would probably be spending money on it anyway. The downside to a business like this is that it’s hard to keep your hobby and love of the merchandise separate from the commercial interests of the enterprise. In the end therefore, while there are exceptions, a business such as this typically remains in the hobby realm and does not develop into a larger, more profitable enterprise.

2.) The second category is Lifestyle Businesses. This is the kind of business that allows you to have flexible hours and maybe even flexible geography, yet pays you well enough to make it worth doing. An example of a lifestyle business would be working as a business coach. There’s no doubt that there are some coaching businesses that are large, have several partners and various administrative staff and are extremely profitable, but on average, these are one- or two-person Lifestyle Businesses. They take advantage of the background and capabilities of the owner and allow that owner to make a good wage with a lot of flexibility; however they are highly unlikely to become fast growth companies with many employees. There is nothing wrong with Lifestyle Businesses, in fact, they can be great! It is important though that you understand their limitations and realize that if you are trying to create a fast growth business, then that is a different animal, with different lifestyle, investment, risk and upside expectations.

3.) The next category is Franchise Businesses. This one does not require too much explanation, since as consumers, we’re all familiar with a large number of very successful food franchises, such as Subway, McDonalds, etc. Franchise Businesses do not appeal to all entrepreneurs, but they do appeal to a good number, particularly those who have come from jobs in corporate America and are accustomed to a structured environment. Franchises can be great businesses, with excellent profitability. Also, on average, given the proven system they usually provide to their franchisees, Franchise Businesses fail at a much lower rate than the overall startup population. On the downside, Franchise Businesses can require a significant initial investment that is outside the reach of many entrepreneurs. They also require ongoing royalty payments to the Franchisor. That said, they can be an excellent alternative for the aspiring entrepreneur who has very little experience in startups and who has some funds available to dedicate to the franchise startup costs.

4.) The fourth category is Self-funded Growth Businesses. These are not hobbies, they are not Lifestyle Businesses and they are not Franchises. Rather, they are businesses that you start with the intention of growing them into large enterprises with many employees and many millions of dollars in revenues. In this category, you are funding the startup costs yourself, from your own assets and available credit. You are not seeking outside investors, most likely because you want to retain control of the business and you do not want to have to answer to equity investors, whether they be friends and family, angel investors, or venture capitalists. Since you typically need significant funds to start a growth business (let’s say $250k plus), this type of business is usually started by someone who is either independently wealthy from other sources, or has started and been successful with other businesses and wants to pursue their next great idea. Just because businesses in this category are self-funded at the outset, does not mean that they will not take growth funding down the road, rather it means that in the startup phase, the company founder(s) do not want the complications of having outside investors. Businesses in this category can fall into a number of industries and business types, depending on the background of the founder(s).

5.) The fifth and final category on this list is Outside-funded Growth Businesses. Such businesses often fall in the technology space, as this is an area of great interest for angel and venture capital investors, two of the most common types of equity investors in early-stage companies. Because they are “Outside-funded” does not mean that none of the founder(s)’ money goes into the business; it just means that a significant portion of the funding comes from outside sources and a good portion of the control of the venture is ceded to those outside investors. For many types of true growth companies, given the startup costs required relative to the net worth of the company founders, there is no choice but to take outside capital [investor pitch template, here]. This is not all negative, of course, as having the participation of the right investors can help the founders accomplish many of the early partnering and customer seeking activities necessary to achieve success. On the other hand, most any entrepreneur who has worked with outside investors will tell you that they would much rather be able to drive the business in the direction they want, without having to answer to outsiders. So taking equity investment from outsiders is a doubled-edged sword, but the reality is that, particularly in the tech space, very few of the great companies that you would know by name were started and grown without the benefit of outside equity capital.

This list of startup business types is not exhaustive, but it gives you an idea of the five broad categories of businesses that you may consider starting. Before you invest the first dime in your business, I strongly suggest that you come to terms with the type of business you are trying to start. If you find that you want to start a business that you simply cannot afford to fund from the resources of the founder(s), you will need to seek outside capital. In that case, there’s a wide variety of funding sources that you can consider. In any case, you will want to make sure you do a good job of screening your ideas to ensure that they truly represent the types of opportunities you want to spend your time, money and other resources pursuing.

I hope you have found this helpful in gaining perspective on the types of ventures you may start up and grow. If you have any questions with regard to how to apply these ideas to your particular venture, don’t hesitate to contact us. In any case, we’d love to hear your thoughts/comments/questions/ideas. Please enter them below or in the top right corner of this post.

Paul Morin
CompanyFounder.com
paul@CompanyFounder.com.

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  • riley

    I feel like most small business are hobby types where the people have such a passion that they want to share with others. I think also with the internet people can have business to sell their crafts for instance like on etsy. There they can make as much money as they want but do it on their own time and not have to do anything more then they want to.

  • I think that’s true — most small businesses are more hobbies than businesses. This is perfectly fine if the founding entrepreneurs understand and acknowledge this reality. Issues arise when there is inconsistency between the expectations and the reality. Entrepreneurs must learn to differentiate the various business types, then be honest with themselves regarding what they’ve created and where they are trying to take it.

  • This is a very informative article. Starting up a business is quite tricky and scary. You really need to be a risk taker. I also agree that some business started as a hobby at first until one decided to make it grow. Some business just came out of its owner’s mind and because they know how t handle it very well, it grows.

  • Thanks for your comments. A willingness to take risks is essential for any entrepreneur. The ability to understand those risks and to optimize the situation to the extent possible is a key to what distinguishes successful entrepreneurs from unsuccessful entrepreneurs.

  • Valentine Smith

    The point the high failure rate on these kind of businesses is correct, much of it could be down to poor advice, lack of experience etc but I wonder if you have considered the financial risk element. Setting up any business is a risk (no matter how experienced you are) but these are generally low cost businesses, so naturally there will be more people prepared to take a risk on these businesses, therefore there is a higher failure rate. Just because there is a high failure rate doesn’t mean these people are naive, simply the financial risk is lower so they are prepared to take the entirely rational decision of entering into a high failure rate industry because the cost of failure is low.

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  • I found this helpful, however i knew all of this before hand! im just stuck at what i should sell! i dont care what it is doesn’t have to be a hobby but that would be nice. i thought about this and really it is really really hard. i’ve made a company name / logo. so im all set but now the hardest part is what to my company is going to sell! doesn’t have to be retail. like it could be a advertising company but i’ve got a friend whos got one so i wouldn’t even go down that lane haha! but please someone help?

    thank-you

  • Dylan

    I found this article very helpful in being able to distinguish the different types of businesses out there. I am currently exploring different options at starting up a “Hobby Business,” and so it was helpful to read what you had to say on this. Do you have any tips on how I can maximize the growth of my hobby business, so that it does indeed become a hobby business and not just a hobby? The start of the business is here: http://www.CheapSoccerCleatsHQ.com

  • Thanks for your comment, Dylan. The Company Founder site is full of tips for growing your business and making it profitable. Take a look through the site and I’m sure you will pick up some ideas. The key is to continually test your ideas and concepts. Move forward with what works, tweak or discard what doesn’t. In your soccer cleat business, I would look for ways to target organizations (clubs, teams, affiliate groups, etc) that would buy your products in bulk. Best of luck in your endeavors.