John Pescatore

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John Pescatore
VP Distinguished Analyst
11 years at Gartner
32 years IT industry

John Pescatore is a vice president and research fellow in Gartner Research. Mr. Pescatore has 32 years of experience in computer, network and information security. Prior to joining Gartner, Mr. Pescatore was senior consultant for Entrust Technologies and Trusted Information Systems… Read Full Bio

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What I Want for Wednesday: More “Lifestyle” Companies

by John Pescatore  |  October 22, 2008  |  5 Comments

A few years ago I was talking to a venture capital firm about small security companies that might potentially IPO. When I mentioned a few small companies that I thought had good technology and happy customers, the VC said “Oh, those aren’t IPO targets – those are ‘lifestyle’ companies.” When I asked what that meant, he explained that the CEOs just liked running companies, they weren’t aggressive enough to head towards IPOs.

Gee, what a sin: a CEO who likes to run a company, enjoys providing value to customers, and has employees that like to work in a company that values customers over Wall Street. 

A side note: the same VC also talked about small companies needing “lighthouse” accounts, big wins that would attract other big customers. I said we usually call these “reference” accounts and that lighthouses were actually used to warn ships away from shoals and reefs and other forms of danger…

Now, in the interest of full disclosure: I worked at Trusted Information Systems in the firewall space, and Entrust in the PKI market, through each of their IPOs. I wasn’t at either of them early enough to have equity and make a killing when they went public, so maybe I’m just jealous. But I saw the negative effect going public had on both company’s focus on customers and I’ve seen it time and time again in my 9 years at Gartner.  I think there are a narrow set of circumstances where your vendor going public is good for you – though, of course, the same is true about your vendor getting acquired, which is today’s exit strategy of choice.

I think the phrase “exit strategy” is telling. What you really want is a security vendor who has a “staying strategy.” You can find at least one “lifestyle” vendor in most markets – InfoExpress comes to mind in the personal firewall space. Any others out there?

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5 responses so far ↓

  • 1 David McCoy   October 22, 2008 at 12:52 pm

    Hi John…

    I too am intrigued with the idea of lifestyle companies. I heard the term back in 1995 or 96 associated with a small vendor in my space. It was not used as a nice term, but I thought it was actually a nice concept. Like you, I thought there was something un-natural about the exit-strategy-driven companies of the day – they seemed to be everywhere and they just felt artificial. I grew tired of CEOs pounding their fists on the table and calling themselves, “internet plays.” Not the way to describe a company – very much the way to describe an investment vehicle. But the exit strategy guys were often the ones driving innovation, press notice and excitement. The lifestyle guys were happy just being alive and knocking down a few million a year for the owner. In those days, “a few million for the owner” was peanuts compared to the insane-level monetary prize everyone wanted. There was little excitement in being a lifestyle company. Although, where are most of those “internet play” companies today?

    I concluded long ago, that if I were running a company, I would be no fun at all. I would run it as a lifestyle company and no one would pant over my technology, no one would write about me, and I would just be a niche provider – a deliriously happy niche provider having the time of my life, loving my job, my product and my life. Certainly that is just one view of the lifestyle company, but it was a pleasant thought.

  • 2 Dan Sholler   October 22, 2008 at 4:38 pm

    I do not think that the issue is a “lifestyle” company at all. It has much more to do with whether the organization has developed a culture and management capability that focuses on delivering value to customers in a sustainable business model. This can be true regardless of the ownership structure.
    I have used the term “lifestyle company ” to describe companies that have missed growth opportunities because the management was comfortable with what they were doing, and did not want to make the investment (and take the risks) associated with capturing those opportunities. Nothing wrong with this, except that there are many times where that decision is doing a disservice to the owners/shareholders. If the decision maker is the sole owner, then it certainly is his or her prerogative to make that kind of decision, but it also is a indication to a customer of what they can expect from that company in the future.

  • 3 John Pescatore   October 23, 2008 at 8:04 am

    Well, there are growth opportunities that cause companies to over-reach, or head in faddish directions and end up in drastic reductions in product/service/support quality – but fast ramps in revenue/profit. Many VCs would say a CEO who avoided that was running a lifestyle company – I want to see more of that type of growth avoidance.

  • 4 Rob Lewis   October 30, 2008 at 9:18 am

    If you are a start-up not looking for a buy-out in a few years, it does limit one’s options. I wonder if VCs should consider an exit strategy option of a buy back of their shares (say at 8-12 times investment) when a certain revenue target is hit?

  • 5 Jim Flowers   December 28, 2008 at 2:48 pm

    Sorry, I’m late. I just discovered this post. Here’s an interesting side note. According to the SBA, about 1/3 of all new jobs are created by companies with fewer than 20 employees, and the growth spurt does not come right after launch. It typically comes years later.

    See http://www.sba.gov/advo/research/rs328tot.pdf

    Could these jobs be coming from lifestyle companies? I’m thinking yes.

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