Why We Haven’t Yet Started a Lifestyle Business Incubator

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For a while now, I’ve chewed on the idea of starting an incubator. All the cool kids are doing it.

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

Published on 11.30.11

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