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The Value Of Diversification

By News Creatives Authors , in Small Business , at October 18, 2021

CEO at Innovation Department building the next generation of consumer brands. Advisor at Saturn, Act+Acre, and Perelel amongst others.

My business was scaling rapidly, posting double-digit month-over-month growth in a way that things felt, at least for a brief moment, easy. Some time before that, I had asked some fellow entrepreneurs, almost uniformly more successful than I, “What does product-market fit look like?” They almost all said the metrics might vary, but you’ll know it when you see it.

Finally, I thought to myself, this is what everyone was talking about. We had found a channel that was working remarkably well, and everything we did just seemed to click. We kept pouring our time, energy and capital into that single channel, and in turn, were rewarded with more and more growth.

Until we weren’t.

I will not regale you with everything that went wrong (it was a lot) and all the mistakes that were made (there were plenty), but suffice it to say that when things turned against us, seemingly everything turned against us in concert. And because we’d doubled down again and again on the one channel and strategy that was working so well, when the rug came out from under us, we didn’t have any other reliable sources of growth. Our business shrank, we felt foolish and it took us a long time to redirect the business back toward growth.

The lesson we took from it and have subsequently applied isn’t a novel one: Don’t put all your eggs in one basket. But that’s easy to say, harder to follow when one basket seems to be working really, really well. The tradeoff between a tried-and-true approach and investing time, energy and capital into a new, unproven avenue can feel wasteful if not irresponsible. I’m here to tell you, resolutely, that you should be thinking about choosing to diversify your dependencies before you’re forced to diversify.

I think this is especially true today, where countless entrepreneurs depend on single companies for critical components of their business — Facebook to acquire customers and Amazon to sell products, to cite just two examples. I know more than a few consumer brands that were reliant on Facebook for the overwhelming amount of their customer acquisition, and when iOS 14 was implemented their business models stopped working overnight. Similarly, I know plenty of people who built great Amazon businesses only to have a competitor launch a malicious attack on their brand and see them suspended and unable to resolve it, functionally bankrupting them.

The question then is: When do I diversify my business? There’s no pat answer for that, but I’ve come around to the idea of believing that you should as soon as you can possibly afford to. Once you’re able to make payroll and stop eating ramen three times a day and perhaps even feeling like things are going pretty well, challenge yourself to go figure out how to diversify.

How do you know what you should be diversifying? Simply ask yourself, do you have a single product that if it disappeared your business would be in trouble? Or a single channel you sell through that if you could no longer sell through, it would be disastrous? Or perhaps a single way of acquiring customers? Or a single supplier? The answer was probably glaringly obvious for you before you even read my prompts. If it’s not, congratulations; you may be one of the few without any dependencies that you need to address and you should be sleeping easier at night. For everyone else, and really, that usually is nearly everyone in the early stages of entrepreneurship, get to work.

So what does that mean in practice? Here are a couple of easy ways to get started:

• Allocate a small amount of budget every month to trying new channels. If you’re completely reliant on Amazon, commit to spending capital every month building your direct-to-consumer channel. If you acquire all your customers using Facebook, commit to finding customers through another channel. Set this budget, and enforce that it’s not spent elsewhere. It’ll almost definitely perform worse than your best channel, so you may be tempted to redirect that spend into the channel that’s working. Don’t. Through iteration and persistence, you’ll find new channels that work, and gradually you’ll build diversification.

• Build diversification into your strategy and goal setting. Most businesses use some form of metrics and high-level goals to help guide the decision-making process for the broader organization. Once you understand where your concentration is, you can consciously create firmwide goals to de-risk. Making these goals highly visible and endorsed by leadership means junior team members, rather than being fearful of pursuing channels that may yield nothing, will actively test and experiment with the knowledge that such behavior is praised rather than lambasted.

Don’t endure the hard lesson I did, saying you’ll focus on diversification tomorrow when you have more time, capital or energy. This is simply too late. Tomorrow never arrives. Diversify today, and know you’re ready for if and when something goes wrong.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?


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