The Diversified Portfolio

Diversification is important in business. Without it, all you build is at risk.

When I mentor or advise businesses, I examine the diversification of every business element once the initial scale has been created.

What do I look for? That…

• Each client is worth, at most, 10% of revenue.

• A single traffic source generates at most 40% of revenue.

• Core team members can be replaced if needed within 90 days.

• 50% of expenses can be cut within 15 days if needed.

• There are multiple streams of sales.

• There are at least 2 core revenue streams, with at least 4 ideal revenue streams.

The list goes on. 

Although it doesn’t make sense to think about this list too heavily when you’re building a business, you need to make sure that—as you grow—you’re not relying on a single thing…

Because if that single thing goes down, the entire business could break.

Let’s zoom out and discuss what to do when building a portfolio…

We currently have 34 businesses inside The Wisdom Group that we own over 5% of. We help advise, grow, and manage these businesses. The group will earn over $100 million in revenue in 2023 and will likely add another 15-20 businesses by the end of that year.

However, each business has its own “strategy” that is then "stacked” with the rest. Here’s what I mean…

Some businesses in 2023 have zero requirements for any top-line revenue or profit growth, but their singular focus is to grow their user base.

Others will bring pure profit, with extremely high margins and little overhead. One of our certifications will produce $2.5-3M in revenue in 2023, with an 80% profit margin.

On the other hand, we have businesses where we will look to increase their revenue by 2-5x, without profit being the main driver.

The important part is that the businesses are balanced and diversified, which for me means balancing:

A). Moonshots (businesses that sell for more than $100M)

B). Audience Growth (businesses that are in audience-building mode)

C). Growth (businesses that don’t require more than a 20% profit ratio)

D). Profit Maximizers (businesses that are in a stabilized area and are profiting over 45%)

E). Tuck In’s (businesses that have low operating expenses and high LTV increases for the portfolio)

When balancing the businesses, we also must balance which of the 3 segments we’re inside—Education, SaaS, and Media—and the 3 sub-segments we’re inside of—Business, Health, and Lifestyle.

For example: Not only do we want to balance how many Software Companies we have versus Media companies, but we also want to balance the amount of Business versus Health.

Why? We never know what will happen in one segment, and ensuring that one segment isn’t over-leveraged ensures that if a down cycle occurs in one area of the portfolio, the profit segment can compensate for it.

This also allows us to do another essential thing as a portfolio of businesses that reduces risk.

Which is both to package sub-sets of businesses to blend growth and profit for investors or for selling in the future.

This means that a business that isn’t attractive for selling due to its low potential growth—or a business that isn’t cash positive—can be brought into a group of other businesses and sold at a much better price simply because it’s more lucrative for someone to purchase as a "box set.”

In short, diversification is essential because it lowers risk substantially. The more risk you take away from a business, the easier it is to create predictability and obtain investment or create a scenario for an ideal exit.

The more quickly you diversify, the easier it is to scale later. The problem?

The more you diversify, the harder it is to gain momentum. Much like a balanced stock portfolio, the more you balance, the slower your growth.

In a business, for example, if you attempt to take and spend away from something that is already working on getting something new working, you will lose return on ad spend for a while until that second thing works as well as the first thing.

In other words, you rob yourself of the short-term return for long-term protection and gain. Hence, diversification must be done slowly, over time, and with the long-term in mind. Because if something is “too” balanced, it may never grow, just like if something isn’t diversified, it may go “poof” at a moment's notice.

You diversify, step-by-step, knowing that you’re balancing the future and the now. 

- Scott