What are the benefits of diversification to startups? Do the cons outweigh the pros?
Diversification is the process of expanding market share or entering new markets by launching or acquiring new products through licensing, mergers, or acquisitions. This can either be Concentric, Horizontal, or Conglomerate Diversification. Startups are often faced with the decision of diversifying ventures following the need to increase revenue and further solidify brand presence.
The process of diversification goes beyond being a growth strategy of entering into a new market or industry, to also putting together the best team to handle it. This is often a difficult and delicate decision for startups to make as this move can either make or mar the brand.
A startup can diversify in several ways ranging from acquiring a new business, adding a new market segment or selling new products or services, but of course, the presence of the right team will determine how successful this venture will be.
It is common knowledge that running a successful startup requires exquisite strategy execution, adequate seedfunds or strategic partnerships following the exponential market competition across different sectors.
After raising funds, questions that often pop up are; What next? How do we grow bigger? How do we solidify our brand? How do we get more customers? How do we actualise set goals? How, How and more Hows. This phase often leads to startups looking for bigger and faster ways like diversification. The problem in this strategy is that most startups do not fully understand the process of diversification.
An interview with founders of startups has revealed that most founders after noticing how difficult it is to carve a niche in just one particular market space have often thought of diversifying their venture immediately after their first seed fund. It is a good motive to leverage different ventures at once but how prepared are they for the pros and cons?
Some of the factors founders of startups need to consider before concluding to diversify include carrying out a market forecast to determine what will work well for the brand, cross-checking internal rate-of-return calculations and assessing competitors in the new or existing market they want to diversify into.
It is crucial for a startup to identify its unique and competitive strengths as these would come into play as strategic assets. A good diversification strategy will lead to an increase in sales and revenue and reduce the risk of strained operations.
