December 24, 2009 — Over the past 6 months, our startup has taken two approaches to diversification. We initially tried no diversification and then we tried heavy diversification.
In brief, my advice is:
Diversify heavily early. Then focus.
In the early stages of your startup, put no more than 33% of your resources into any one idea. When you've hit upon an idea that you're excited about and that has product/market fit, then switch and put 80% or more of your resources into that idea.
An investor diversifies when they put money into different investments. For example, an investor might put some money into stocks, some into bonds, and some into commodities. If one of these investments nosedives, you won't lose all your money. Also, you have better odds that you'll pick some investments that generate good returns. The downside is that although you reduce the odds of getting a terrible outcome, you also reduce the odds of getting a great outcome.
A startup diversifies when it puts resources into different products. For example, a web startup might develop a search engine and an email service at the same time and hope that one does very well.
There are 4 main benefits to diversify:
1. Better odds. Creating multiple products increases the odds of finding a great idea in a great market. The Internet provides very fast feedback about whether you've found one. After building your team, the next big thing to decide is what product to focus on. You should not choose one until you're built a product you're excited about and found product/market fit. You've found product/market fit when about 40% of your customers think your product is a must have.
2. Builds individual skills. Entrepreneurs need broad skillsets. Trying multiple products forces you to learn new skills. You may build a consumer video site and improve your technical scaling skills while at the same time be trying a B2B site and improving your sales skills.
3. Builds team skills. Doing multiple products gives you plenty of opportunities to interact with your team in varied situations. You'll learn faster what your teammates' strengths and weaknesses are. You'll also be forced to improve your team communication, coordination, delegation and product management skills.
4. It's fun. Let's be honest, the early stages of working on a new problem or idea are oftentimes the most stimulating and exciting. Instead of focusing on one product day in and day out that might or might not work, trying multiple ideas keeps your brain going and your enthusiasm high.
If diversifying has so many benefits, should you ever stop? Yes, you should.
Focus when you are ready to make money.
Coming up with new ideas and building new, simple products is the easy part of startups. Unfortunately, developing new solutions is not what creates a lot of value for other people. Bringing your solution to other people is when most value is created--and exchanged.
Imagine you're a telecom company and you build a fiber optic network on the streets of every city in America--but fail to connect people's homes to the new system. Although connecting each home can be hard and tedious, without this step no value is created and no money will come your way.
When you hear the phrase "execution is everything", this is what it refers to. If you want to make money, and you've got a great team and found product/market fit, you've then got to focus and execute. Drop your other products and hunker down. Fix all the bugs in your main product. Really get to know your customers. Identify your markets and the order in which you'll go after them. Hire great people that have skills you are going to need.
Let's recap the benefits of focusing.
1. Money. Creating new products in the early days is fun, but making money is fun too. Once you start focusing on growing one product, the money incentive will keep you motivated and spirits high.
2. Rewarding. Creating value for other people is perhaps the most rewarding feeling in life. Finding people with a problem, and getting your solution which solves their problem into their hands, is even better than the money you earn. You'll also create valuable jobs for your employees.
3. Resources. If you execute well, you'll end up with resources that you can use to put diversification back into the picture. For instance, after bringing better search to almost the whole world, Google can now diversify and create better email systems, web browsers, maps, etc.
When you first begin your startup it's very similar to playing roulette. You plunk down some resources on an idea and then the wheel spins and you win more money or lose the money that you bet.
In roulette, you can bet it all on one number(focusing) or bet a smaller amount on multiple numbers(diversifying). If you bet it all on one number and win, you get paid a lot more money. But you're also more likely to lose it all.
The "game of startups" though, has two very important differences:
1. You get more information after the game starts "spinning".
2. You can always move your bets around.
You get way more information about the odds of an idea "hitting the jackpot" after you plunked some time and money into it. You may find customers don't really have as big a problem as you thought. Or that the market that has this problem is much smaller than you thought. You may find one idea you thought was silly actually solves a big problem for people and is wildly popular.
You can then adjust your bets. If your new info leads you to believe that this idea has a much higher chance of hitting the jackpot, grab your resources from the other ideas and plunk them all down on this one. Or vice versa.
Sadly I bet there are paperboys who's businesses have done better than all mine to date, so take my advice with a grain of salt.
But if you want to learn more, I suggest reading the early histories of companies such as eBay, Twitter, and Facebook and see what their founders were up to before they founded those sites and in the following early period.
And check back here, I'll hopefully be sharing how this approached worked for us.