These Companies Are Built To Enjoy

In my November 14, 2011, column Reengineering Capitalism I introduced the One Million by One Million (1M/1M) project. My proposal is that if one million entrepreneurs can reach $1 million each in revenues, that would translate into 10 million jobs. Over the past few months I have been studying the entrepreneurs who come to pitch at 1M/1M roundtables. There are exciting opportunities for angel investors to join hands with competent, pragmatic entrepreneurs and make a great deal of money.

Let me show you the money!

First, meet La Grande Dame. The idea for the venture came about when mother–daughter team Michelle and Catherine Wood realized they had spent a decade scouring stores across the country (and sometimes abroad) for stunning clothing and accessories. The shopping trips were often marred by tears in the dressing room and unkind words from salespeople who “didn’t have anything big enough” for Michelle, a size 18. So Catherine and Michelle started La Grande Dame in Los Altos, California, as an online boutique dedicated to high-end fashion for plus-size women.

The company was launched in April 2009 during the great recession. A year later, when they pitched at my roundtable, this pair had about $9,000 in monthly revenue. They were trying to figure out how to increase the conversion rate of their marketing campaign, which is what we discussed at the session. However, it looked like La Grand Dame was on its way to becoming a “real business.”

For investors, the question is whether the company has enough of a target market. Roughly 62% of women in the U.S. are plus size (size 14 or higher), resulting in a $64 billion market. Assuming 10% of women shop online, that’s a $6.4 billion potential market. La Grande Dame’s niche is the higher-end consumer; women aged 30–55 with annual household income of more than $100,000. This further subsegments the market, but nonetheless, the target market for the business is quite large. Michelle and Catherine are enjoying growing the business. They may consider selling in the distant future, but definitely not in the short term. (More details here: The 1M/1M Incubation Radar: La Grande Dame.)

Two other companies from the 1M/1M program: Phitch and Artimus Art.

Phitch is an inventory optimization software for QuickBooks users that already has 25 paying small-retail customers, a validated pricing model, and a rather cleanly defined market. There are millions of small retailers, and many of them run their businesses on QuickBooks, making them perfect targets for John Krech, the Minneapolis, Minnesota–based entrepreneur behind the project. Whether or not this is a billion-dollar market opportunity, it is certainly at least a $30 million dollar opportunity.

Artimus Art, which presented at the same session, is a service for parents to turn their children’s art into museum-quality photo books. Massachusetts entrepreneur Dana Hostage has so far sold $250 books to 65 customers. Whether her customer count can reach 6.5 million is questionable. It is, however, not a stretch to think that Hostage can recruit 4,000 customers, which will get her to the prized $1 million mark.

These companies are typically not on the radar of investors. On their own they will be somewhat successful. With some mentor capital they could be enormously successful.

That brings me to the observation I have been pondering for a while. It may not always be apparent who would buy a business like Artimus Art or La Grande Dame to provide a clear exit strategy for the investors. The entrepreneurs may not be interested in selling. This is their passion, and they want to continue to enjoy the process of running and growing it.

So, what if the idea of exit was removed from the equation? What if the investor and entrepreneur agreed to a different model – the model of sharing dividends? With a $500,000 investment, if they succeeded in building a $10 million a year company with a 20% profit year after year, they would collect several million dollars in dividends.

It beats me why angel investors continuously chase exits. It seems to me they can make a lot more money, or at least an equivalent amount of money, with a built-to-enjoy approach rather than the built-to-flip model. It would open up a much larger set of opportunities for entrepreneurs and investors to join hands.

In 1M/1M we are determined to support entrepreneurs interested in built-to-enjoy businesses. I hope with time the angels will, too.