How to Diversify Your Business Interests The best hedge against relying on only one stream of income is diversification. Here's how to get started with diversifying your business interests.
By Lisa Song Sutton Edited by Chelsea Brown
Opinions expressed by Entrepreneur contributors are their own.
We are entering an unstable time in the market. Inflation is at an all-time high, and the costs of basic necessities from food to gasoline are continually rising. The best hedge against inflation is real estate, and the best hedge against relying on only one stream of income is diversification.
Diversifying your business interests insulates you from circumstances out of your control. My business portfolio is wide and varied: food and beverage, real estate, shipping and ecommerce. The 2020 pandemic was the ultimate justification in my business diversification. My food business took a massive hit as tourism temporarily came to a screeching halt due to government-mandated shutdowns. In contrast, for as hard hit that Sin City Cupcakes was, shipping, real estate and ecommerce had their best years. People started home based ecommerce businesses, and they fled high-tax states to move to Nevada. Had I not been diversified and solely relied on just one business as my main stream of income, I would have been in a world of trouble. So, how can you diversify your business interests?
Related: Focus on One Thing, or Diversify?
Read and pay attention to industries or business models that catch your eye
I started Ship Las Vegas in 2018, because I was intrigued by the model of mailbox rentals. Mailbox rentals are miniature storage units. They are a low-maintenance, low-overhead item that produces steady, consistent and recurring revenue. The only problem was that I knew nothing about running a mailbox rental/pack-and-ship store. So, I went up the street from my house to the local independently owned mailbox rental/ship store and made a proposal to the owner: I will pay you $10,000 if you let me follow you around for two weeks, train in your store and capture your business processes for you. I will compile everything into a procedural handbook for you and be the best trainee you've ever had. He agreed, and the next day I started my 2-week apprenticeship that I paid good money for. I viewed the $10,000 as an investment into the business model.
Hedge against world circumstances and focus on steady, recurring revenue
Regardless of what conflicts may be happening overseas or what items the outrage mob is currently obsessing on, there are some constant truths: Mailbox rentals are monthly, recurring revenue, and insurance premiums are monthly, recurring revenue. I am invested in an insurance company, and it's not a business model that I had paid much attention to previously. Yet, I have been a willing and paying consumer every month without much effort, thanks to autopay. It's an expense that I will continue to pay, regardless of what is happening in the world.
Consider investing in business models that are "safe bets." Which industries have products or services that are monthly, recurring revenue? These are ideally associated with a monthly cost that is mandatory or strongly suggested by law or community — not glamorous, not sexy, but essential. For example, car insurance is required in the state of Nevada in order to register and drive a vehicle on public roads. As a result, people will find a way to ensure that their monthly car insurance premium is paid, regardless of what may be going on in the world around them.
Related: 4 Ways an Entrepreneur Should Diversify Their Income
Stay attuned to opportunity
My entrepreneurial journey started with my bakery. I didn't start Sin City Cupcakes because I was passionate about baking and hoped one day to start my own bakery. My co-founder Dannielle and I were catching up on the phone one night in November of 2011, and she shared that she had been playing around with recipes for alcohol-infused cupcakes. A bell went off in my mind, and I was immediately enthralled with the idea. Alcohol-infused cupcakes are a fun, celebratory item.
Las Vegas is an international destination where people come to overspend, overindulge, buy and do things they won't buy and do at home. We needed alcohol-infused cupcakes in Las Vegas, and I wanted to help start the company. I had zero baking experience and had to learn how to bake when we started the company. It proved to be a popular idea, and now we are very grateful to have incredible staff that have pastry degrees and more baking experience than I could ever hope to achieve myself. Hire well, and get out of their well.
Subscribe to newsletters and listservs that feature different lines of business
You don't know what you don't know. The best way to learn about various business models is to have them delivered to your inbox on a frequent basis. I enjoy subscribing to tactical newsletters like "Contrarian Thinking" that feature examples of entrepreneurs owning "boring businesses" I generally wouldn't think to invest in. I also reached out to local Las Vegas business brokers and asked to be added to their mailing list. In my opinion, most businesses that are listed with a business broker are either overpriced or tend to rely on very surface financial calculations to determine a sale price.
However, the value of being on the mailing list is two-fold: One, It gives me insight into various business models, and two, I can understand what trends are happening within my local market, which is always good information for later. For example, if there's a cluster of businesses in the same or overlapping industry all for sale at once, or if there are several businesses for sale from the same part of town, all of this is good micro information to help assess macro environments like local real estate.
Related: The Importance of Portfolio Diversification for Your Investments
Seek out investment vehicles that de-risk a loss of investment, while also pushing an impact or purpose button for you
I joined a $10 million private equity fund last year as a general partner. The fund supports entrepreneurs who are in the pre-seed and seed levels of their business (a.k.a., just getting started) and focuses on founders who are veterans or military spouses. My father was career U.S. Air Force and then worked for the Department of Defense while I was growing up. He passed in 2020, and I know that he would have loved my involvement with The Veteran Fund. Supporting our U.S. military families is very important to me, and this fund pushes that impact button for me. From an economic and business standpoint, the fund also serves as an investment vehicle through which I can be part of companies in diverse spaces, from virtual marketplaces to climate technology to data centers on the moon. Most importantly, the fund invests in these varied companies with a procedure that's as mitigated and de-risked as possible.
Many private equity funds shy away from pre-seed or seed level ventures, as the beginning of a company is generally the riskiest stage. My partners and I examined the failure points for most startups in the country and addressed each through the fund's criteria in investments, as well as how we show up for the founders. We don't just write a check and rest on our laurels, waiting for a company to make it or not. We put our entrepreneurs through an accelerator program with the Founder Institute and also built an all-star team of LPs and Venture Partners who are subject matter experts in their respective industries.
You can go as deep in your diversification as you want. Start small and steady. For example, if you have a 9-5, W-2 income job, keep that as a stream of income, and start a side hustle. Be willing to work nights and weekends on your side hustle, while your main job keeps steady income coming in.
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