DIVERSIFICATION FOR THE ENTREPRENEUR
Diversification for the Entrepreneur
For most entrepreneurs, their business is their baby. Much like when raising a child, they pour everything they have—and every dollar they earn—into making that business a success.
No matter how good an entrepreneur’s idea is, however, they are not immune to
risk. As such, it’s important that entrepreneurs remember to diversify—just as any
smart investor does.
The Importance of Entrepreneur Diversification
Here at Nest Financial, we’ve found that entrepreneurs tend to invest steadily in their own businesses until they hit a net worth of roughly $3 to $5 million. After that point, they begin to diversify based on their risk tolerance. Some choose alternative investments, some choose real estate and commercial property, and some choose to invest in other entrepreneurs through angel and private equity investing. This may sound promising, but there are thousands of entrepreneurs who never hit that $3 to $5 million mark and whose businesses fail. These entrepreneurs may lose everything and have to start over from scratch, in part because they didn’t diversify when starting their businesses.
Ideas for Diversification
Too many people believe that a mix of investment vehicles or industries is all it takes to diversify. In truth, real diversification is a much more delicate process—especially for an entrepreneur. Not only do you need to diversify your portfolio holdings based on sector, vehicle, time line and risk, you also need to consider the benefits of diversifying your business.
Think about your business as if it’s an entirely separate portfolio. If you, for example, were invested 100 percent in XYZ stock in your personal portfolio, you’d immediately see how risky that was. In the same vein, if your business is too limited—with too narrow a focus—you’re essentially working with a single investment—a single opportunity to make it.
Instead of being so limited, consider complementary products and services you can offer within your business. Find ways to branch out and offer consultation services or repair services. You can also expand the areas you serve and find ways to offer scaled-back, less expensive versions of your product/service to increase your potential customer base.
Diversification doesn’t just protect an entrepreneur; it also protects a business. Reduce your overall risk in both personal holdings and your business, and you can create a firmer foundation from which to grow.
No investment strategy, including diversification, can guarantee a profit or protect against loss.