During the COVID-19 pandemic, an Asian business owner I advise became bored. So he started a shrimp farm.
He already owned a highly profitable group, sufficiently diversified around one strong core business.
When he later asked us to help future-proof it, our analysis exposed what he had missed: A major competitor was taking market share; an important product launch had been delayed repeatedly; and the senior executive entrusted with expansion and growth had been underperforming for some time.
The shrimp farm was a distraction. Whether it made money was the wrong question.
A venture can be profitable and still cost you far more than it earns. You pay with headspace, management capacity and the growth you could have achieved elsewhere. Every hour spent on opportunity A is unavailable for opportunity B. That is opportunity cost, and it rarely appears in the new venture’s business plan.
Your strength can become your weakness
Our greatest strengths often come packaged with our greatest weaknesses. Entrepreneurs are natural optimists, problem solvers, dealmakers and opportunity hunters. They scan the world for possibilities and get excited about what they find. That instinct helps them build businesses. Unchecked, it scatters their energy across investments, projects and companies they lack the capacity to manage.
It can resemble entrepreneurial attention-deficit/hyperactivity disorder or ADHD: attention constantly jumping toward the next exciting thing.
The practical limit depends on your money, time and the people you can assign to new ventures. But I encounter this dilution of focus with almost every entrepreneur I advise.
Success makes it worse. The more successful you become, the more fantastic opportunities arrive. I call this the kid-in-a-candy-store phenomenon. There is always another sweet. For your business, it can be the devil disguised as opportunity.
Hotels are a recurring example among my clients, particularly in Asia. Some owners feel they should have a hotel, too. They describe it as an investment in real estate. Yet operating a hotel demands expertise that most of these owners do not have. For a few, it fits. For many already stretched thin, it adds an unfamiliar business and another drain on attention.
The pain of focus
Your default answer to a new opportunity should be no.
Jony Ive recalled Steve Jobs asking him, ‘How many things have you said no to?’ Rejecting ideas he never wanted to pursue did not count. Real focus meant turning down something he passionately wanted to do because something else mattered more.
That hurts. It is supposed to. The word ‘decide’ traces to the Latin ‘decidere’: to cut off. Choosing the outstanding opportunity means cutting off other good ones. Whether you are an owner, CEO or investor, sustained attention to your strongest core businesses is what allows them to become exceptional.
Family businesses offer useful examples. Ferrero built generations of growth around confectionery and related products. LEGO’s response to its financial crisis included an explicit return to its core: LEGO bricks. Both show the value of building around a clear core.
The fat pitches
Yet owners often assume that entering more businesses is automatically healthy diversification. Too often, they venture beyond their expertise and lose money while weakening the business that funded the adventure.
Warren Buffett quoted IBM’s Thomas Watson Sr., ‘I’m smart in spots-but I stay around those spots.’
Buffett applied that discipline by passing on opportunities and waiting for the ‘fat pitch.’ When attractive businesses were unavailable at sensible prices, Berkshire could put money into short-term instruments rather than force a deal. Its substantial cash holdings illustrate the capacity to wait; they were not simply money doing nothing.
A fat pitch, put simply, is a rare, extraordinary opportunity with exceptional upside relative to the risk and investment required. It gives you a real chance to hit a home run. Most opportunities do not qualify.
Meanwhile, your core business can look reasonably healthy and still fall far below its potential.
Developing that potential may offer your strongest, safest route to greater wealth for everyone involved. Constant distraction means you never find out.
An addiction to opportunities
Another client described his urge to enter new businesses as an addiction. Our work included a difficult cure: divesting and letting go. Some businesses had absorbed substantial investment, and he was still hoping for a turnaround. Selling even at a loss freed him to return to businesses that deserved and needed his attention.
Money already spent is a sunk cost. It cannot justify sacrificing more money and attention when the future case no longer holds up.
I also designed a decision system for him: a sequence of tough questions, supported by metrics, that every new opportunity had to pass. Most ended in no.
Such a system must be customized. Every entrepreneur has different resources, circumstances and responsibilities. Each sees the world through a different lens and considers different opportunities.
There is no universal checklist that can make the decision for everyone. One of his tests was a refined version of the fat-pitch question: is this opportunity truly extraordinary for him?
The people blind spot
Another addressed his judgment of people. Deals had looked wonderful on paper, but the projected returns blinded him to unsuitable partners. His otherwise sound judgment switched off when a sufficiently shiny number appeared.
Projected returns remain theoretical until realized. Between the spreadsheet and the money lies a long road of execution with actual people. One rotten egg in the partnership can make that road miserable.
We built partner scrutiny into his decision process, and he exited toxic partnerships instead of repeating them.
A third client, whose core business was valued at $1 billion, described a similar pattern. His personal investments in stocks and real estate had done well. His investments in new businesses had performed poorly almost every time. He trusted the stories told by the people running them too readily and backed businesses that did not merit his money.
The common mistake was seeing who people could become and investing as though they were already those people. Entrepreneurs often overestimate partners, opportunities and their own resources.
Potential matters. So do present competence, character and evidence of delivery. Build your decision around the people who exist today.
The five to thrive
1. Default to no. Reserve yes for rare opportunities that justify their full cost.
2. Price your attention. Ask what the new venture takes away from your core business.
3. Know your strengths. Diversify only when expertise and management capacity support it.
4. Judge partners as they are. Verify delivery and character before trusting projected returns.