The most noteworthy contribution of venture capital (VC) is the creation of thousands of high growth enterprises, by investing large sums of equity capital and realising fancy returns, all in less than seven years. By repeating this magic across a range of industries and geographies, VC has made entrepreneurial finance synonymous with high growth enterprises. The biggest casualty of this association is what has come to be known as lifestyle enterprises. And here is why.

What is a lifestyle enterprise?

Lifestyle enterprises are motivated by the founder’s desire to achieve a certain lifestyle, both in terms of income and pace and style of work, and to run his or her own enterprise rather than work for someone else.

Lifestyle enterprises do not grow big and are often contented to stay at sales levels ranging from a few lakh to a few crore rupees. The constraint to growth could be on account of the nature of the industry or simply the choice of the entrepreneur. They are often found in industries that are not easy to grow into a global or even a regional enterprise and are frequently associated with highly trained or skilled individuals who chose entrepreneurship as a way of life, although that need not be a binding criterion for an enterprise to be described as a lifestyle enterprise.

Small garment knitting ventures, plastic utensil manufacturers and local service centres of sophisticated appliances are examples of such enterprises.

Lifestyle businesses are funded by the owners and their family and friends. They may occasionally have some bank loans, secured by the assets of the enterprise or the personal assets of the founders or their family members. Institutional equity investors like venture capitalists are reluctant to invest in lifestyle enterprises because of the perceived difficulty in disposing of their shareholding.

A global phenomenon

In nearly all economies, lifestyle enterprises play an important role. Amar Bhide, a leading scholar in the field of entrepreneurship and author of the book The Origins and Evolution of New Businesses , believes that they form a substantial and important part of entrepreneurship in America. That is also the case with many other developed countries. The Global Entrepreneurship Monitor, a study of entrepreneurship across 70 countries in the world coordinated by the Babson College and London Business School, suggests that in the developing world lifestyle entrepreneurship is more common.

Set to grow in India…

Two important forces are likely to drive the growth of lifestyle entrepreneurship in India in the medium term. A large number of business professionals may choose to take to entrepreneurship to remain professionally engaged but at their own pace, as opposed to their high velocity corporate careers. An increasing number of women have also been seen to take to entrepreneurship to achieve better work-life balance.

Key challenge

The greatest challenge facing lifestyle entrepreneurs will continue to be availability of capital. Not all lifestyle businesses will receive debt financing, especially those that do not have tangible assets such as merchandise, equipment or buildings to offer as security. And equity investors will continue to be deterred by the prospect of realising a return on investment and eventually disposing of their shareholding in a limited time period. This extreme focus on exit is a distinctive feature of contemporary VC investing.

Indian stock exchanges and their regulations do not offer any hope of exit for equity investors in lifestyle enterprises. Lifestyle enterprises are unlikely to be attractive acquisition candidates either. The other remaining alternative would be for the enterprise to buy back its shares using own cash resources. But to make it easier for a company to buy shares back the current provisions under the Companies Act will have to change.

A different mindset

What is worth underlining here is that in the years to come, lifestyle entrepreneurship will have to play a critical role than it currently does. For that to happen, our mindset towards lifestyle enterprises has to change. Policy planners, investors, lenders and everyone else connected with the entrepreneurial ecosystem has to stop looking at high growth ventures as the only blossoms in the garden of entrepreneurship and lifestyle enterprises as mere weeds. If nothing else, it is these unsung enterprises that will provide the many goods and services that are the staple of our daily lives.

(The author is Chairperson of NS Raghavan Centre for Entrepreneurial Learning at IIM Bangalore. Views expressed are his own.)

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