Spreading The Risk: How To Strategically Diversify For Sustainable Company Growth

In the risky realm of entrepreneurship, putting all your eggs in one basket can lead to precarious situations, both in your short-term commercial success and your long-term growth trajectory and exit potential.

As companies expand, they often face increased risks due to over-dependence on limited customers, geographic markets, supply chains and more.

Strategic diversification is not just a prudent choice; it’s a vital maneuver to safeguard your business from unpredictable setbacks.

With that in mind, here’s how to strategically mitigate risks associated with key areas of diversification.

Customer concentration

Over-reliance on a handful of customers can spell disaster if one decides to part ways. Diversifying your customer base helps stabilize revenue streams and reduce the volatility of your business performance.

Implementing a robust customer acquisition strategy that leads to customer diversification — where there is no small group of customers contributing to the majority of sales, and where your customer base is a healthy mix of market segments or industries — can cushion the company against the loss of a major client and market volatility.

I have seen companies lose significant M&A value due to customer churn as that one customer accounted for 50% of their revenue.

Expanding geographic reach

Concentrating on a single country or region increases vulnerability to local economic downturns, political unrest or regulatory changes. Companies should look to international markets for expansion — not just to increase their customer base but also to mitigate risks tied to any one locale.

This geographic diversification can be achieved through online platforms, setting up remote sales offices, or partnerships with international distributors.

Securing multiple supply chains

Sole reliance on one supplier for raw materials or key components can lead to significant operational disruptions if that supplier faces issues like price hikes, production halts or goes out of business.

To avoid this, companies should develop relationships with multiple suppliers across different regions. This approach not only helps in negotiating better terms but also ensures continuity of supply.

I have seen companies lose three or four quarters of revenue due to such issues. This can destroy a company. By the time you sort things out, even your loyal customer base may be long gone.

Considering ‘what if’

There are many diversification strategies to think about, including product or service diversification.

Every entrepreneur should take a step back and play a game of “what if.”

What if your biggest customer churns? What if your key supplier vanishes? What if there is a natural disaster or political unrest in your key geography? What if your key technology is now offered as a free feature by a major player?

If you work to mitigate these risks, you will cushion yourself from volatility and lay the foundation for sustained growth.

Itay Sagie, a strategic adviser to tech companies and investors, specializing in strategy, growth and M&A, a guest contributor to Crunchbase News, and a seasoned lecturer. You can connect with him on LinkedIn for further insights and discussions.

Illustration: Dom Guzman