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Thoughts on Parallel Entrepreneurship

January 21, 2013

“I’ve made countless mistakes in my entrepreneurial career.

My biggest was attempting to be a parallel entrepreneur whereby I was foolishly trying to run two companies at the same time.

Startups are an all-consuming thing.  It’s hard to split time and passion across multiple ones.  Startups are hard enough as it is, but balancing two at the same time is almost always a bad idea.”

– Dharmesh Shah Cofounder of HubSpot

When I started my business, years ago, my vision was to build a company that spun off multiple companies that would be run in parallel.  The idea was simple; most businesses will fail, so build a couple and focus on the money-makers.

As time progressed it became clear that this is difficult in practice.  As a small entity, the pain points became very clear, very quickly.

One winner syndrome

No matter how many businesses you are able to successfully spin off, there will always be one winner.  One company will be growing faster than another.  One will generate more profit than another. In the case where you have one business that is in high growth and another that is in mediocre growth, how could you possibly justify capital allocation to company that is growing slowly?

Upfront capital

Every single business has some form of capital requirement.  If you decide you want to build three businesses in parallel, you’ve immediately got to divide your human capital and finances into three groups to make it happen.  This means you’re risking three times as much capital.

Returns

By building multiple companies in parallel, it becomes increasingly harder to make larger returns.   Let’s look at two entrepreneurs.

Bob built three companies and was able to achieve 10% month over month with one.  He decides the other two companies are unprofitable and shuts them down.   It cost him roughly $150,000 to start all three companies and another $25,000 to wind down the two other companies.  To get his money back, he needs to invest another $151,744 to keep the company afloat long enough to reap the reward.  His total capital invested is $301,769. By the end of year 5 his investment returned $2.5 million.  That’s about an 8.3x return.

Jill built one company that achieved a 5% month over month growth at a cost of $50,000.   Instead of being busy winding down two other companies and laying off staff, Jill was able to keep tweaking her company that by month 3 they achieved a 10% month over month growth.   To get her company to break even she needs to invest an additional $160,487 for a grand total of $210,487. By the end of year 5, her investment returned $2.3 million.  That’s almost an 11x return.

Lack of Resources

The biggest challenge any startup has is a lack of resources, whether it is time, focus, finances or human capital.  By splitting those limited resources across multiple companies, you are effectively reducing its power.There are a million little things to do in a startup that start compounding over time.  If your time and focus is split it’s hard to measure your impact.  If your finances are split it’s hard to know if a dollar is better served in one company or another.

Conclusion

With all that being said, I do believe there does come a point, where running businesses in parallel makes sense.  When a company has effectively hit a ceiling with it’s own core offerings, should it consider expanding into new ventures or product offerings.

Let’s get back to basics and build a product that has a large target audience, maximize that product’s economics, scalability and marketability.  If you’ve tried everything and can’t make the product work, start over.  Eventually you’ll find a product that does work and you’ll hit a ceiling, at that point you’ll have an abundance of resources to run in parallel.

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