Why We Haven’t Yet Started a Lifestyle Business Incubator

16 comments
Why We Haven’t Yet Started a Lifestyle Business Incubator post image

For a while now, I’ve chewed on the idea of starting an incubator. All the cool kids are doing it. I thought about it again today because Chris brought it to me last night. We could get a second house here in Bali, or somewhere in the Philippines, staff it, fund entrepreneurs, and give them a great environment to get their businesses off the ground. I’m sure we’d have a world class cost structure and experience.

Incubators seem to work well for start-ups– companies that have the potential to offer a huge return for investors. Unfortunately for my incubator dreams, I don’t know anything about start-ups.

I’m good at building small lifestyle businesses. “Small” meaning less than 5 million in revenues, and “lifestyle” meaning the first question I ask to business owners isn’t generally:  How can you maximize profit? But rather: What do you want to do, and how can your business help your get there? Is there overlap between normal businesses and lifestyle businesses? Sure, lots.

I’m sure Ian and I could help entrepreneurs grow their businesses much faster. We’ve already done a lot of the heavy lifting, especially if they are looking to start an internet marketing or e-commerce related business.

We are even at the point where we are actively seeking investments. So why no incubator?

The hypothetical scenario I can’t get past…

Let’s say Ian and I front the house, food, cash, and basic expense for first 6-12 months.

Ballpark cost for 12 months solo founder: 24K

Since I’ve seen the 1000 day principle work out over and over again, let’s say we can even accelerate that, and 12 months in to it, Ian and I are no longer burning cash.

  • Months 12-24: Solo founder is socking cash and taking a small salary.
  • Months 24-36: Things take off!!! Business pulls in 100K in earnings during this period. Ian, myself, and solo founder see potential in the business, so instead of taking 10K distributions each, we decide to keep the cash in the company and grow it, hire employees, etc.
  • Months 36-48: The company is going gangbusters! We have all gained 30 lbs around the waist and live on different continents. A couple kids have come along. The business has been wonderfully successful and generated 200K in pure profit. Ian and I really didn’t have much contact with the business because we’ve been incubating businesses and running our own.

Solo founder is crushing it. However, since Ian and I requested 35% equity for our investment and mentorship, solo founder must write us a HUGE check– $70K for stuff we did 24 months ago (man that’s a long time). That’s a emotionally paralyzing thing to do when you’ve been slogging out every friggin dollar, every friggin day.

Solo founder owes the IRS 35%, and ME 35% of her annual income because of a nice place I provided years ago…

Solo founder could probably buy us out, but that would both cripple the company and she wouldn’t have any money to feed those kids that came along.

Now some might say, you guys are incubators! Angels! Take less equity! If we were to come in at 5% or 10% equity it’s a dismal affair for us, and we’d lose a bunch of money and waste a lot of time for sure. You gotta make it count.

I suppose we could flip the script and bring in “founders”– or founding employees– on a full salary and a low level of equity 15% equity and have them gradually vest in to the company. Perhaps we could give them opportunities to buy equity from us at certain points.

Part of it is that I just don’t roll in the start-up crowd. It’s a little late at night– but off the top of my head, I don’t know a single person who’s run a successful venture backed start-up.

Entrepreneurs out there…. I’m game. Email, comment, tweet me your ideas. I’m looking to expand. I just don’t have the imagination.

Cheers,

Dan

If you’d like to hear directly from me, plus listen to 50 free podcasts outlining how I grew a million dollar business while I traveled the globe, just toss your email address in the form below:

Published on 11.30.11
  • http://blog.michaelmichelini.com Michael Michelini

    hey Dan
    great post – I am also considering back and forth to put effort here in shenzhen for an incubator.  

    But yes…an lifestyle business by definition is different than a startup – traditional startup is supposed to go big quick or fail…..that is why a lot of venture startups are crushed before they can really get a chance…..and some people dont like VC money.

    you can also try some very early stage seed incubator – where your goal is to “set them free” in 1 year by listing them on a website for new investors to take it to the next level…simply help them get on their feet and you take your exit very early – just be clear upfront.

  • http://largebandwidthcollider.com/ Joseph Rooks

    This just emphasizes something that’s probably obvious to your readers and listeners… Your relationships with smart people (who can figure their stuff out on their own) are far more valuable to you than whatever money you could dig out of them by being opportunists.

    The idea of incubating small lifestyle businesses seems kind of silly to me. If it needs to be incubated to this extent, why wouldn’t you just pick a better idea to start with? Could promote lazy non-thinking. People who can’t hustle their shit together can’t immediately jump into a situation where they’re set for 12 months and be expected to do a good job.

    Investors wouldn’t fund anyone who couldn’t hack it, and anyone who could hack it wouldn’t take funding from an investor.

  • http://twitter.com/IvanKrachanov Ivan Krachanov

    What if you leave the money out of the table and provide mentorship to a small group of founders working from their homes for a small equity.

    There’s no money involved, it’s scalable and you can always cut somebody off in the early stages if he/she is not living up to your expectations.

  • http://stephenrcampbell.com Steve Campbell

    To me the primary benefit of the incubator is the idea of a bunch of smart people, working in shared space, on their their own projects at the same time.   It seems like the energy in the room is the thing.

    Having access to people who have done it before is useful, but I don’t know if it’s as valuable as that shared energy.

    Seems like the DC gets you part of the way there. Some type of community working get together might move it even further along. Rather than an incubator a one or two week working conference type thing.

  • http://everything-everywhere.com Gary Arndt

    Just have a house with internet and let people pay you rent.

    If they want additional services, they can pay you for those. The cost savings come from doing it the Philippines and not in a Western country. 

    Hell, I know a lot of people, myself included, who would stay there for a month or two just to work. 
    You could easily open up centers like this around the world.

  • http://everything-everywhere.com Gary Arndt

    Why does it have to be so full blown? 

    Just have a house where people can work for several months at a time. They pay you rent and you can provide other services for them on an as needed basis. 

    I can’t see anyone giving up equity to rent a room in the Philippines when places like Y-Combinator can give so much more for less. 

    There are a lot of people, myself included, who would gladly pay rent for a few months in the Philippines or Bali if there is a really good internet connection.  I’m not going to give equity in anything for a room in a developing country. 

    Just create an environment where stuff can happen…and it will.

  • http://twitter.com/ttimchik Tim

    Have you written any information about how a start-up founder can get a 3+ month visa to these places? Eg. I can get 90 day tourist visa to Thailand and work on my business, but I will get in trouble for working? Do you need some other type of visa to stay longer? Do you have to pay tax in that location (Thailand, in my example). This information seems to be hard to find and may be one reason why more people aren’t opening lifestyle businesses.

  • Nicolás Tapia

    Hey Dan, I sent you an email.

  • http://twitter.com/myeggnoodles Chris @ MyEggNoodles

    I find the ideas of incubators really interesting. From what I’ve read, I also think they are over weight with most expecting their new funded start-ups to shoot for the moon. I’ve never been keen on this model, and is why I’ve always considered profit when working on new projects.

    As for your feedback, I’m guessing we were thinking of different scale.

    My idea was to give 4 to 8 smart folks with solid business ideas enough cash to feed themselves and cover basic set-up costs for a year. 

    A perfect applicant would say something along the lines of:

    “I’ve built this service in my spare time while working a full-time job to pay my living expenses. I plan to do X, Y and Z that should grow the customer base. If I had help with my living expenses, and some mentorship, I would be able to accomplish these goals faster. I would also be able to improve the product, explore new revenue streams and look into new customer acquisition strategies”

    You’d hope a year would be enough time for the founder to break even and get some profit in the bank – especially with the added benefit of smart mentors and good working environments.

    Most investors work on the premis that a third of their portfolio will break even, a third will flop and a third will make profit. If you funded 8 smart guys at $12k a pop (more than enough to live in Asia for a year) and 2 of the founders broke $100k in profit in the second year…. you get the idea. 

    As for profit split, I’d suggest quarterly dividends rather than ask the founder to pay out a hefty share 36-48 months down the line. I’ve never seen a model like this before.

  • http://twitter.com/carlhancock Carl Hancock

    You are looking at it wrong, at least as far as starting an incubator goes.

    As you already mentioned, any incubator that is taking a 35% equity stake in the startups it is incubating is taking too much.  Y Combinator for instance takes a 2%-10% equity stake in companies they make small investments in with the majority of them being in the 5%-8% range.

    You are looking at 2%-10% of a single company and thinking it would be a dismal affair but you aren’t looking at scale.  Sure, being an incubator and only providing a small investment, guidance and resources to a single startup for a 2%-10% equity stake would be dismal… and that is why incubators typically don’t incubate a single startup. 

    Most incubators like Y Combinator invest in a bunch of startups and constantly add new ones each year as the others eventually either A) Fail, B) Get acquired or C) Buy out the investors equity. Both B and C would be the exit that brings a return on the investment for the investor.  In extreme cases there is a D which would be an IPO.

    So the trick to being an incubator is incubating a bunch of companies at one time.  Some will fail, some will do okay and some will be successful. If you invest in a very small number of companies as an incubator (ex. 1 or 2) then the likely hood of you failing and never seeing a return is greater.

    The other key is going to be putting together a system that you apply to each startup that you invest in.  The system being what you provide that startup along with an initial small investment (ex. Y Combinator rarely invests more than $20,000 in it’s startup).  That system could include office space, strategic guidance, access to resources, etc.  It’s what you bring to the table and what you provide the startups that you invest in other than simply giving the a little bit of money.

    As Chris mentions in his comment, dividend payouts should happen more regularly.  Quarterly is common or twice a year.  Dividends typically don’t start kicking in years after the initial investment.  Obviously if the startup isn’t making a profit, there won’t be a dividend for that period.

    As for simply getting a house with good internet and renting space, that isn’t an incubator.  That is a coworking space. Completely different business model.  That is like being a landlord.

    If there are no real internet related incubators where you are located, or they are few and far between, then it might be a good business to start. I’m guessing incubators already exist in the Philippines, although not necessarily in Bali.  

    Also at least one commenter mentioned incubating “lifestyle” oriented businesses doesn’t make much sense. He’s correct.  It doesn’t, at least not the “lifestyle” oriented business most “lifestyle” design business experts tend to champion.  When people promote and sell others on starting their own “lifestyle” business it’s typically so they have full control over what they do so they can live the lifestyle they want.  Taking an equity stake in that doesn’t make much sense.  Thats why if you start an incubator you need to forget the “lifestyle” business fad and incubate real businesses and products. 

    Somewhere along the way “lifestyle” design became about being able to live in paradise while doing so as cheap as possible and working as little as possible.  Most “lifestyle design” gurus seem to think that “lifestyle” businesses are all about super small operations consisting primarily of just themselves doing affiliate marketing, selling ebooks or the latest “marketing system”.  This model is extremely shortsighted and most people won’t be successful at it.  

    The worst “lifestyle design” gurus are the ones that make their money teaching people about “lifestyle design”.  So they make money teaching people how to make money teaching people how to make money.  It’s our generations version of the infomercial salesman giving you the “live your dreams” pitch. 

    I’ve been following the lifestyle design community a lot over the last few years.  My impression is it appears some of these lifestyle experts live in places like Thailand because it’s so damn cheap and it’s the only place they could afford to live making very little money while promoting themselves as highly successful online.  Those lifestyle design experts who scrape by via affiliate marketing, or selling their latest ebook or online webinars on lifestyle design.  Meanwhile if they transported themselves back to America or Europe where they came from they likely couldn’t survive because they would be broke.  That is why places like Thailand are a hot bed for these types of people.  It’s cheap.

    There is nothing that says you can’t build a regular business, with an office, employees and sell traditional products or software while still living the lifestyle that you want to live.

    I own a software business.  I have 2 business partners and we also have employees and an office.  Is it a “lifestyle” business? Not if you go by what most “lifestyle” bloggers and pundits promote.  But it allows me to live the lifestyle I want to live.  If I want to spend a month in Mexico, I do it (and have done it).  I’ll be spending all of January in Costa Rica.

    Your lifestyle is what you want it to be. Make it happen.  

    Please note… my rant regarding lifestyle design is not directed at Dan or Ian.  I enjoy following what they do online and don’t lump them into the group I rant about above.  There are people who are into the “lifestyle design” scene that are great people with great ideas and great products.

  • http://twitter.com/carlhancock Carl Hancock

    I want to add that when I rant about lifestyle designers, it’s about the minority that tries to make money simply by promoting lifestyle design.  Those selling ebooks, online courses, the latest “system”, as well as pushing other lifestyle design products via affiliate marketing. The “1%” of lifestyle designers who don’t do anything truly interesting except sell the concept of lifestyle design.

    Frankly I don’t consider location independent and mobile entrepreneurs to be lifestyle designers.  They are simply entrepreneurs who happen to be living the lifestyle they want to live.  That also may or may not include being mobile or location independent.  Not everyone dreams of traveling the globe and bouncing around from country to country.

    In some cases they aren’t even entrepreneurs, they may have a job working for someone else that affords them the ability to live the lifestyle they want and love doing it.

    As I mentioned I fall into that entrepreneur category.  I own a business, have business partners and employees. It allows me to live the lifestyle that I want to live. But I don’t refer to it as a lifestyle design business. I think that term makes it sound small.  I own a company that sell kick ass products and our success as a company allows me to live my life on my terms.

  • Steven Moody

    This sounds solid.  The incubator is about some money but more importantly mentorship and an in-person network to help maintain your tempo.  Most startups pay investors after an acquisition or IPO, but dividends make sense for a business of this size.  If you do it, you’re going to lose most of your money in the first few years, because the startups you want probably don’t need $12k.  The money is nice, but its the potential for the environment that is more critical IMHO.

  • dylanized

    I’d like to second everything Carl said.  I think it’s important to differentiate between “lifestyle” companies, and “growth” companies.

    A lifestyle company is intended to maintain its current trajectory and provide complete control for the original owners, so they can really determine their lifestyle. There’s a cost for that, because you could always scale your biz more dramatically if you took funding (a loss of control).

    I would consider 37signals to be a lifestyle company, because they bootstrapped it and refuse scaling or acquisition offers, instead staying small and in control. But they are the exception, most lifestyle companies arent as rich/famous as them.

    It doesn’t make sense to have equity in lifestyle companies, because they’re not going to have a big payout for the investor, and the entrepreneur is going to resist the loss of control.

    Never mind revenue sharing, which makes it more complicated. Maybe there’s a model for a lifestyle incubator, but I don’t know what it is.

    Growth companies are different. In this scenario, the goal is to (1) validate the business model and (2) scale it up, as quick as possible, to (3) hit some end point where the founders+investors have a payoff.  The payoff might be acquisition, or a buyout, or (if everything goes great) an IPO. 

    Investment in growth companies makes sense at 2 phases – 

    Seed funding – a small test investment just to get the idea off the ground, and validate the business model, and

    Venture capital – a larger investment, once the business model is validated, to be used to scale the business up to mass profits

    The idea of a 35% revenue share (or any revenue share) on a seed round for a growth startup doesn’t make sense. It would be added hastle that would slow down the scaling.  But getting 5% of the eventual payoff could be massive.

    For growth companies, an incubator makes total sense, because 1 win pays for all the losers.  As an example, I read that Y-Combinator’s earnings from the eventual Dropbox IPO/acquisition will make ALL of their other investment outlays look like pocket change.

    ** In Summary **

    Dan if you really want to make money, here’s what I’d do: rent a villa and offer 6 months of free room and board in return for 3% equity in any Y-Combinator or Tech Stars startup. 

    You could offer these founders all the perks, maid service the whole 9 yards.  Time the offers so it’s right at the end of the U.S. incubator sessions, when the founders are looking for new places to live anyways. Make your villa the defacto overseas startup dormitory, sit back and wait for a couple big wins.

    (Not to mention all the press you’d get!)

    You could call it Tropical Combinator :)

  • http://www.CloudVenturesGroup.com steve

    Hi

    what a lot of people want starting out or even experienced. is to share with like minded people in a climate thats doesnot suck.

    So here my pitch.

    Take 10% to provide accomadation, learning and support. call it the Tropical Incubator.

    Also they should work on one of you rprojects FOC as they gain experience from that process and you can mentor them whilst getting something back for your time.

    Your cost base for Bali is way to high. Just provide all the esentials not “entertinment” they should be there to work in a frugal way not be living the ife of riley.

    how does that sound.

  • http://FoolishAdventure.com Tim Conley

    Something not mentioned in the post or the comments is owning a stake in cashflow businesses.  I guess that comes from having the discussion framed as an incubator.  

    In this discussion, I’m assuming “lifestyle business” as being defined as a lone, location independent web-based business — probably affiliate marketing or small infoproducts.  I assume this because reading the comments it seems that’s how it’s being used.

    And “growth business” as the perceived typical tech startup one would read about on techcrunch or hacker news — you know, boom or bust businesses.

    I’ve invested in a couple of cashflow businesses in the past — small companies with the potential to earn a couple hundred grand to a million+ in revenue.
     
    You can even buy into existing cashflow businesses and not just startup businesses.

    I’ve also met several guys over the years that owned parts of several businesses —  being a silent (or mostly silent) partner, can be a lucrative way of investing.  You’re not hoping for some big lottery win in the form of getting acquired by Microsoft or Google.

    This is a pretty common approach to investing for small local/regional businesses, but it gets overlooked because of the tech startup acquisition glitz.  And well… it’s kind of boring — you provide capital to a small business owner and you receive a piece of the profits — and no one ever reads about you or the business.

  • http://twitter.com/MichaelPorfirio Michael Mason

    “The worst “lifestyle design” gurus are the ones that make their money teaching people about “lifestyle design”.  So they make money teaching people how to make money teaching people how to make money.”

    Well said.

Next post: