By Elana Fine, Associate Director, Dingman Center for Entrepreneurship
This past week’s signing of the JOBS (Jumpstart Our Business Startups) Act has brought a lot of attention to technology startups who hope to have better access to capital through crowdfunding. By expanding the pool of investors beyond traditional angel and venture capital investors, the JOBS Act provides fresh access to capital for early stage companies. Although most of the press on this act has related to technology start ups, it remains to be seen whether it will increase financings for small businesses often categorized as “lifestyle” businesses.
Those of us who spend a lot of time with early stage companies that are looking for capital often find ourselves categorizing companies into two buckets – high tech companies suitable for angel/VC funding and lifestyle businesses. The traditional thinking behind this often unfair labeling is that high tech companies in social media, gaming, cloud computing and other related sectors offer investors the hope of a high multiple IPO or M&A exit that will justify the upfront risk and uncertainly. Companies that don’t fit this profile are lumped into this other less sexy category of “lifestyle” businesses, based on the assumption that these companies may not have an exit but will generate enough cash for their owners to take home a cushy salary and live a balanced, stress free life.
The truth is, there is nothing lifestyle about a lifestyle business. If asked, most entrepreneurs opening a restaurant, building a services company or launching a consumer product are constantly worried about making payroll, losing customers and planning for the unexpected. They barely see their family while they work around the clock to avoid additional labor costs. They max out credit cards, put second mortgages on their houses and hit up every uncle, rich or not, for capital. Lifestyle business gives the image of a satisfied shopkeeper closing down on a sunny afternoon to hit the golf course. The reality is these companies have a harder time finding funding than their tech start up counterparts due to tight credit from banks, lack of assets for collateral, and generally lack the possibility for angel or venture investments. I haven’t heard of incubator for up and coming fashion designers, restaurateurs or local contractors. Yet, these are the businesses that are the “glue” of our communities – -not flashy or the next Facebook – but businesses that provide the goods and services we rely on every day and create jobs. As someone who has used the “lifestyle businesses” term on many occasions, I can’t help thinking that there needs to be a better term for this category of companies and a better way to get them financed.
These lifestyle businesses have a branding and capital problem. Why not just call these companies small businesses? We rarely call a technology startup a small business – don’t know why- but we don’t. By following the lead of their tech startup counterparts, these companies need a fresh name and a fresh voice to call attention to their lack of access to capital, similar to the strong voices that lobbied for the JOBS Act. Most of the typical descriptions carry negative connotations – low growth, low tech or capital intensive are some that come to mind. What if we call these companies Upstarts? Could there be an Upstart America Partnership that creates opportunities for these businesses to receive relevant discounts and connects with relevant suppliers, manufacturers and funders? The JOBS Act’s crowdfunding exemption could provide some additional access to capital to these future Upstart entrepreneurs, but due to lack of financing alternatives and unified voice there are still a lot of ideas that will remain un-started.
Elana Fine is the Associate Director of the Dingman Center for Entrepreneurship. In this role, Elana manages the Dingman Center Angels, a network of active, accredited angel investors providing open and efficient access to early-stage capital for entrepreneurs in the Mid-Atlantic region, and is also the primary center contact within the Smith School and on campus. Prior to joining the Dingman team, Elana was an Associate and a Vice-President at the Boston office of Revolution Partners, a national middle market investment bank specializing in mergers and acquisitions and private capital advisory for the technology industry. Elana earned an MBA from the University of Chicago’s Booth School of Business and a BS in Finance from the University of Maryland.