Risk and Diversification as an Entrepreneur

Last Updated Apr 3, 2007 11:08 AM EDT

No one is infallible when it comes to business. I learned this lesson pretty early on when I started my first business. With the naivety of a college student, I approached DVA (my first company) thinking that business was like a mid-term or a final exam, and that success was clearly quantifiable and directly correlated to intelligence and hard work.

Business is impossible to predict, mistakes are expected, and success is a combination of hundreds of variables – some within our power and some not. 

With that in mind, it is easy to understand why the masters of business over at Wall Street place so much emphasis on diversification. It is definitely not for a lack of confidence in their abilities. They understand that mistakes are expected and success is impossible to predict; the more they spread out their risk the better the chances of riding the winners.

If risk is difficult to quantify for Wall Street which is dealing with established companies with recurring revenues, proven concepts, large customer bases, and experienced management teams, then it is beyond impossible to project at the start-up level. 

Because start-up risk is so volatile and difficult to predict that Venture Capital firms have become masters of diversification. They understand that a portfolio of one or two companies, even if they are the “next big thing” is crazy. Every single day incredible ideas are born and die and professional investors mitigate the heavy risk inherent in the game by diversifying into multiple positions.

So what about the entrepreneurs, us poor souls who invest our live savings, multiple years of sweat equity, 18 hour days, and shattered social life’s all for a single lottery ticket with such bad odds that even the very best of the best of investors aren’t willing to commit even 20% of their resources to? 

There is no conclusion to this post, only an open ended question that I am sure my fellow start-up founders can appreciate and relate to. We are so caught up in our own confidence that we are blinded by the realities of the space we operate in.

My only advice is that when starting a business, be careful not to commit yourself to a single aspect of your business. You will need to iterate and evolve, so don’t even start unless you can afford to fail a few times within your business. At the end of the day, this might be our form of diversification.