Hobby Businesses vs. Actual Businesses

I've reviewed a few Chicago venture capital businesses on the over the last few months and typically I'm seeing businesses break down into a few categories

1)  Ones that are making good money that are selling at a multiple of that (whether the multiple is fair or not is a different story)
2)  Ones that are not making money selling on the "castles in the sky" theory of investing (someone will come along and pay more for this idea)
3)  Ones that are making a little money but not enough to support anyone.

The worst business to be involved in is the third one, in my opinion.  Here's where I see entrepreneurs spend all of their time, excess money and effort and ability for pretty much nothing in return.  There's an entrepreneurial dream and then there's financial suicide. If someone is involved in the third type of business, at least you can say "I ran out of money, I'm done, I'm going to do something else."  With the second kind of business you are trapped forever in limbo.  Let's take a look at one example of the third type of business I recently came across.

The entrepreneur owns a software company that is producing about $40,000 net profit per year.  He's tried everything to push it further. New interfaces, new marketing techniques, new partners (major ones) new sales people.  Nothing seems to make the software produce more money.  Raising or lowering the price, spending more on marketing, nothing happens.  This happens for years.  In the mean time, this guy is running a programming consultancy on the side that nets around $150,000 per year IF he's working full time.  Due to the software business distraction he doesn't work full time because he can't give 100% to his employers. 

On a personal level, this guy works a little bit on his consultancy business so he only nets around 80k per year plus the 40k from the software.  The consultancy takes up 9 hours of his time with commute and the software takes another 6 hours plus most of the weekends.  So he's actually taking a practical pay cut and he's taking time away from his family and himself by working on a concept that isn't panning out.


So what was my recommendation?  Let the software business float, collect what money you can at the end of the month from it and concentrate on the business that pays more, the software consulting.  Then at night and on the weekends, play with your kids and lead a happy life without the distraction. 

The tragedy here is that he didn't set a cut off date for success or failure on the project so he subjected himself to a business limbo that requires him to work too hard without any financial return that's commensurate with the effort. That's why this type of business is the worst type of business to be involved in.