Radically Honest Blog

Does Your Company Really Need Investment?

People start IT companies for a variety of reasons. Some people want to make money. Some want to be their own boss. Some have come up with an interesting business idea and are driven by self-actualization. Some are eager to create something impactful and significant. But most often even company founders themselves do not fully realize how all these reasons are intertwined with each other.

When a company starts making money and becomes a successful business, there is an important decision to make for a business owner: build a lifestyle business or a startup? I will emphasize that it’s crucial to make this choice, and the sooner you do it, the sooner you will stop worrying and start living.

Here are two definitions:

  1. 😌 Lifestyle business is profit-focused and gives “this is fun to do” feeling. The growth rate for such a business is just a side effect, and the company can stay small for a long time. The main metrics are profit, job satisfaction, and long-term work-life balance. It’s a business that you can do all your life, getting both satisfaction and money. Of course, it’s very important to find a small niche in the market with potential customers and conveniently occupy it. One of the most striking examples of this type of company is Basecamp. I must say that such business can also grow to enormous sizes, but this is not the goal, it just happens.
  2. 💰 The major difference of a startup is that it grows very quickly. The main startup metrics are the revenue growth rate, and the number of users. You are not interested in profit, job satisfaction is not a metric (it just should be somewhere on the “it’s OK” level), and there is a huge shift towards work in the work-life balance. It’s extremely difficult to build such a business all your life, as sooner or later you will reach the point of emotional and physical burnout. There are many examples of startups, take Twitter or Atlassian.

In short, the lifestyle business is slow and profitable, and the startup is fast and expensive.

If you have chosen to build a lifestyle business, don’t even try to attract investment: such financing can only do harm and will not do any good. The outside investors are not interested in profit, they are interested in increasing the company’s capitalization. The investors need growth. If you take the money, you will be forced to turn the company into a startup. And if it doesn’t align with your long-term plans, the investment can easily become one of the biggest mistakes in your life. You will be forced to do what you don’t really like and don’t really want.

Accordingly, if you choose to build a startup, start searching for potential investors immediately, as you will inevitably grow more slowly on your own than with the help of external funding. And if you try to grow quickly on your own, you will most likely lose the competition in your target market.

I made exactly the same mistake. Around 2010, we started turning the lifestyle business into a startup. Pretty much unconsciously. And at that time we hoped to do it without external funding and investing. As a result, our profit dropped significantly, but we failed to achieve a steep growth rate. And then the funny thing begins. The company is no longer very profitable, and the growth rate is average, so it becomes even harder to find an investor and get funding. If we had realized this incredibly simple dichotomy and clearly understood that we were building a startup, we would not have lost several years. And I personally would have saved a decent amount of nerve cells. Looking back, it’s hard not to be surprised at what a fool I was 😅.

Understand your type of company, make a choice, and sleep well.

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