A growth business focuses on a marketplace with potential for rapid and robust growth over the coming years. There may be technological innovations that spawn rapid development of new products, or there may be changing customer dynamics that create new market needs. The promising growth company is one that delivers value-added products into its growth market or niche, and where its customers also understand, need, and value the solutions.
The lifestyle business, on the other hand, is one that may or may not see significant growth, but exists to fund the “lifestyle” of its owner(s). This company could be profitable, but does not necessarily have aspirations of rapid revenue growth. Many businesses that are sometimes referred to as “mom and pops” are in the lifestyle business category.
Growth companies are typically much more attractive to investors than their lifestyle counterparts. In this case, “outside investment” includes the entire range, such as angel, seed, and venture capital investors, other private equity transactions, potential mergers and acquisitions (M&A) activity, or initial public offerings (IPOs). While it is true that lifestyle businesses represent the majority of firms from a quantity perspective, growth businesses embody an economic engine that generates not only growth within the companies themselves, but also spawns creation of other products and services as the overall industry grows.
Most growth companies try to target a marketplace that will allow them to achieve at least $5 to $10 million in annual revenues by the fifth year. While some business plans are legendary in projecting $100 million by the third year, those are rarely ever realized, and unrealistic projections are viewed dimly by potential investors.
Lifestyle companies, for the most part, will expand capital primarily through debt financing, if applicable to the business model. Without a growth model to offer the potential of far greater returns on investment (though admittedly at greater risk), equity financing for the lifestyle firm is usually much more difficult to attract. If equity investment is obtained, the primary source is typically friends or family.