Matching yourself with a good startup opportunity can be difficult and fraught with peril. Having started several companies, people often ask my advice when they are about to join a startup. The first thing I ask in return is what kind of business are they considering joining? I start here because the outcome for employees can be very different based on two very different opportunities.

Startups generally fall into two buckets:

  1. Lifestyle businesses
  2. Velocity businesses

Both are solid choices--one is not better than the other. However, it is critical that people understand the differences so they can choose the best spot based on individual goals and needs.

Let's look at lifestyle businesses first. These are often new retail store fronts, restaurants, even some technology or software businesses. These businesses can be very successful, usually in a small niche markets. But, they will likely never be a billion-dollar business.

Lifestyle startups are often bootstrapped by the founder and grow at the pace of revenue in the door. Because the opportunity is small, less than $50M in revenue, these businesses will likely never be venture capital funded. The founders of the company own most of the equity, often 90 percent or more. These companies can offer equity incentives to employees but as the size of the company is capped by the market opportunity that equity is not likely to be very valuable. Compounding this problem, sometimes there is little motivation by the founders to sell the business; rather they pay themselves more over time. That is why these are lifestyle businesses--it provides a good lifestyle for the founders. These types of startups can be very rewarding for employees, but an outsized financial outcome is generally unlikely.

A velocity startup is very different. These businesses generally addresses a large gap in the market. Many times the gap in the market is present because of a massive shift in consumer behavior--think how the ubiquity of smart phone usage changed business.

Velocity startups have a finite amount of time to gain market share and are often in a heated battle with one or more competitors for market leadership. It is nearly impossible to compete in this kind of market without (sometimes huge) infusions of venture capital. The goals of these businesses are:

  • velocity of customer acquisition
  • gaining a significant portion of the available market

When successful, a velocity startup will ramp revenue very quickly achieving yearly revenue of $100M in its first five years. Companies that achieve these kinds of goals are often valued between $200M and $1B in the relatively short period of 10 years.

Velocity businesses often have binary outcomes, they fly high or fail brilliantly. These companies are like a roller coaster. Once, the bar goes down and you hear the click, click, click, hold on because you're going for a ride! When velocity businesses succeed employee equity can be worth a lot. When they fail you lose your job.

Startups can be a great way to make money, have fun, and learn about business and people. But matching yourself with the correct opportunity is critical to your happiness and success. Do your goals align better with a lifestyle startup or a velocity startup? If those elements are not a match, the dissonance can be very difficult to overcome.

 

Published on: Oct 16, 2014