Questions

How do you determine if your startup company is a business or a hobby?

One of my mentors has asked me the question 'is my startup a hobby or a business?' My startup is an Australian-based edutech initiative that is one year old and post-revenue. To answer this he wants me to choose a metric that encapsulates the reality of the opportunity cost of the time spent on my startup. The background to this stems from my (paraphrased) statements: there's nothing else I need to be doing, I get as much out of this as I put in, etc. Questions: Is my mentor asking the right question? If yes, what metric? If no, what alternative do you suggest?

3answers

If you take less money out than the fair market value of your time, it's a hobby. If you can pay yourself a fair market wage, you own a job. If your business had profit beyond your fair market wage, it's a business.

There is a section on this in my book; How To Sell My Own Business.

You see, I often direct hobby and job owners to auctioneers when it comes time to sell their 'business.'

Hope that helps to clarify things.

Cheers

Dave


Answered 6 years ago

A business has a steady revenue stream coming from a predictable flow of customer leads.

A hobby has inconsistent revenue due to an unpredictable flow of prospects.

A business results from systems. The owner can do other things and the business continues to bring in leads.

A hobby usually relies on the efforts of the owner. When the owner stops, the process stops.

I was watching a Bar Rescue episode recently and host Taffer was explaining to the bar owner that this bar needed to generate $1600 an hour for just three key hours over three nights: Thursday, Friday, and Saturday. If it did that, the bar would make the target profit.

That is an example of the system behind a business. Knowing when the key hours of demand are turns the bar into a predictable system of revenue--assuming the customer base is there to support it. Or else the owner has to get marketing into action to reach those targets...but at least he knows what he has to do.

If he didn't, his bar would remain an inconsistent hobby. He'd make money some nights and not others, and not know why or what he had to to do succeed.

That got me thinking about my own business. When do people predictably buy? How can I plan for that, take advantage of that, expand upon that? What "hours" (more like days of the month for my consulting business) do I need to predictably generate $X to make my money target?

I know most people buy at the beginning or end of the month from me, because that's when their panic alarm really hits as the bills are due ("I need to avoid this"; or, "I can't let that happen again".) But there's also a predictable set of buyers who get ahold of me in the middle of the month, between the 15th to the 20th, say, and I don't know why they do.

I realized I need to look into that, because it's something I can systemize. It can become one of those "3 hour periods on Saturday night" if I make the right use of it; that will turn this kind of buyer from a hobby (as they are inconsistent right now and I don't depend on them for anything except bonus revenue, but I know they're out there) to a systematic, predictable revenue source which is the hallmark of a real business.

See where I'm going with this? Can you answer your own question? I think your mentor is right on in asking and they probably already know the answer. They probably want you to start thinking more about systems on your own initiative. Making some money with an idea is great, but that's just "proof of concept" unless you have made a steady, repeatable, predictable revenue stream out of it.


Answered 6 years ago

The fact that you have revenue is a promising start. If you have some recurring revenue, you have a business. If your "renewal" cycle hasn't yet hit, that will be a key inflection point. In the meantime, continue to speak with your customers about the value they are getting from your product / service. That's very cheap and shouldn't incur any steep opportunity costs.


Answered 6 years ago

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