Early stage businesses are risky. Investors know that. Entrepreneurs are notorious risk takers. Statistically, most new businesses fail. But the ones that succeed often disrupt the status quo, challenging traditional industry leaders, and creating substantial value for their stakeholders. With the benefits of winning so high, American entrepreneurship is alive and well and fueling thousands of aspiring startups each year.
But all too often, we see startups adopting a hedging strategy. They pursue two, three, or more different products, markets, or opportunities at the outset, prior to establishing any beachhead position. When asked, usually the answer is: "its too early to tell which of these might succeed, so therefore we would be negligent to count any of these out."
This portfolio strategy for a newcomer attacking the market is doomed!
A reduced risk strategy for an not-yet-established company will seldom work. While it is possible to just get lucky and win the lottery (and some companies have) the chances of succeeding with a diffused set of investments, lacking a laser focus, has proven to be faulty. The competition is fierce. Well heeled competitors with established distribution, brand recognition, and operating momentum are tough enough to compete with head to head. But, trying to fight multiple battles concurrently is a prescription for disaster.
Startups succeed when their drive, willingness to take on risks, and gorilla strategies all point in the same direction. They win by attacking staid competitors who themselves see that new potentially winning strategy as risky, who lack the desire to do "whatever it takes" to be successful, and who are busy covering their bets so they do not risk the shareholder value they have already created.
This is probably why we often find that entrepreneurs are young and early in their careers. They either are naive to the risks of failure, or they have little to loose. But entrepreneurs who are willing to risk it all, are the ones that big established businesses should be afraid of.
There are many analogies that can help understand why this focus is necessary. Have you ever tried to drive a dull nail into a hard piece of wood? The resistance of the wood, coupled with the larger surface area of the dull-ended nail, makes this a difficult task. Better a very sharp nail with all the force directed on its head to succeed at this task.
War analogies also apply to this situation well. Small armies attacking larger established forces never attack in multiple locations. Instead they pick their targets, focused on the spot of most vulnerability, and use all of their forces in one location. No self respecting general would ever pursue a strategy of trying to go head to head with a much larger enemy in multiple locations at one time and expect to live to fight again. That is until they establish their beachhead and then branch out from there.
And of course there is the old Chinese proverb: "He who chases two rabbits catches neither." Ever tried to chase down even one rabbit at a time - that alone is tough. But with the added distraction of the second, the chances go down exponentially.
Business leaders who are unwilling to focus, to pick one target, and give it all they've got to try to win, are not entrepreneurs at all. They should go back to the comfort of their less risky established company jobs and run a division. As an investor, who better to take advice from than Warren Buffett? Mr. Buffett suggests that if you are looking for a portfolio of investments, then buy the stock of multiple companies, rather than investing in companies with a hedging strategy.
Geoff Moore, Author of the seminal marketing treatise: Crossing the Chasm, suggested that disruptive inventions solve one problem for one market substantially better than the existing solutions (if any exist at all) and focus on taking a single beach head on the other side of the chasm. Doing otherwise increase the risk of failure.
Rather than decrease risk, entrepreneurs that follow multiple simultaneous paths, actually increase their risk of failure.