I attended the Austin Technology Council CEO Summit several weeks ago and observed that there were strong feelings about some of the presenters’ positions among the attendees. Statements like ‘we focus too much on lifestyle startups and not enough on worldchanging ideas’, ‘we need exponential growth businesses’ and finally, the one that got the strongest reaction from many in the crowd, ‘there’s not a shortage of capital, there is a shortage of companies worth funding’ really struck a chord with many attendees and there was much discussion both in support and against these positions during the breaks.
Upon further reflection and conversations with other entrepreneurs at the event I realize that the statements appear true from the lens of venture investors and entrepreneurs looking to create exit-focused endeavors. For those people looking to create exit-worthy businesses these statements ARE correct and lifestyle businesses are likely not the correct focus. Understanding the position and reactions requires an understanding of the different perspectives of ‘entrepreneurship’. I frequently hear entrepreneurs lately describe themselves by how many ‘successful exits’ that they have had rather than by the number of successful businesses that they have built. Entrepreneurship and New Venture Creation are used interchangeably as is appropriate. There remains some confusion among the community about what entrepreneurship means.
According to the authors of one of the top academic textbooks on New Venture Creation, Bruce Barringer and Duane Ireland, there are three types of start-up (new venture) businesses:
Salary-substitute Firms – these firms allow the owners to be their own bosses and to develop and grow their businesses at a level commensurate with the personal lifestyle desired. Salary substitute CAN (and often do) develop into large businesses but they typically are not exit-focused. Many service and local product businesses fit into this category. Digital Marketing firms where the innovation creation is low but innovation deployment is high may be one example of a salary-substitute business.
Lifestyle Firms – these firms conform to the specific interests of their owners passions. An example of this would be a music retail business which grows into a multiple location business and is tied to the passion for music of it’s founder. Lifestyle businesses may be large and even multinational, but they are rarely innovative or designed for an exit. These businesses may be innovative in their specific areas but are not usually driving broad innovation. Some digital media ventures are lifestyle businesses (digital filmmakers, gaming, bands, etc).
Entrepreneurial Firms – these firms bring new products and services to the market and deliver innovation in one or more areas. These firms are developed to create value for their investors and customers and strive to drive growth and scale quickly. Because of the nature of their value offerings they are frequently started with an ‘exit’ in mind, whether that exit is an IPO or M&A activity.
The term Entrepreneur is a derivative of the french words Entre (between) and Prende (to take). It originally applied to the person between the investor and inventor/creator who assembled and integrated the resources necessary to transform the idea/product/service/creative into a a viable business (Barringer, Ireland, 2008). Entrepreneurship is about making ideas into businesses, not just about building businesses to exit (although that is one very popular form of entrepreneurship).
Many startup endeavors today are actually lifestyle businesses or salary substitute businesses. There is nothing wrong with those types of businesses, in fact, our economy is made up of a great number of these types of businesses. You could argue that some of the recent IPOs are lifestyle or salary-substitute businesses that have been dressed up for scale rather than true entrepreneurial ventures.
Where we run into challenges is when there is a disconnect between the investor, entrepreneur, and inventor/creator in terms of the true nature of the business being formed. There is a risk that we have had an inordinate amount of focus and emphasis on venture capital and public market approaches while not paying enough attention to the needs and nurturing of salary substitute and lifestyle businesses as valid forms of entrepreneurship. These businesses provide jobs, services, and local economic expansion. A good mix is necessary to have a healthy economy.
There is an opportunity for all three types of ventures. A healthy business environment has ecosystem, investment sources, and infrastructure to support all three of these types.
Those speakers weren’t wrong at the ATC CEO Summit. They were exactly right – for the type of new ventures that they are interested in. I’m hoping that we can start a dialogue about how to nurture and develop the other types of ventures.