First Rule of Entrepreneurship: Always Have Multiple Revenue Streams
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First Rule of Entrepreneurship: Always Have Multiple Revenue Streams

Image courtesy Shelley Pauls via Unsplash

One of my former students has spent the past few years building a nice income for himself as a YouTuber. If I’m being honest, the first time he showed me his page, I was jealous. Not because I want to be a YouTuber, but because… well… it’s made him lots of money.

Yes, I realize money isn’t the most important thing in the world. But it’s hard not to look at a teenager making a six-figure income, driving a Porsche, and vlogging about his life without thinking, “I wish I’d had that when I was in college.”

Recently, however, he’s run into some troubles. We were catching up during my office hours, and I asked him how his YouTubing was going. “It’s terrible,” he said. “YouTube changed its algorithms, and now none of my videos are getting watched.”

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“Easy for you to say,” he said. “But I’ve got bills to pay. What am I going to do? Start mowing lawns?”

“Well, that’s a different problem,” I laughed. “Sounds like you’ve violated the first rule of entrepreneurship.”

“Yeah?” he said. “What’s that?”

“Always have multiple revenue streams,” I answered.

A startup’s worst enemy

Most entrepreneurs assume that when investors are evaluating startups they’re focused on how much potential a company has for success. After all, traditional VCs are looking for startups with the ability to 10x their investments, so they need companies with enormous upsides.

But good investors aren’t just looking at what might happen when everything goes right for a company. That’s a foolish approach because even the best startups run into plenty of unexpected obstacles, challenges, and setbacks. As a result, when considering investments, experienced investors are also trying to assess how pliable and resilient the startups are. They’re constantly asking themselves: “How much can this startup bend without breaking?”

One of the best ways of judging a startup’s resiliency is to look for single points of failure — SPOFs. In systems design, an SPOF is a part of a system that, if it fails, will stop the entire system from working.

To be clear, SPOFs aren’t always bad. For example, intentional SPOF systems are implemented for airplane preflight checks. That’s important because you don’t want to find out the hydraulics for lowering the landing gear aren’t working once you’re already in the air.

In startups, the opposite is usually true. In startups, it’s not just that things can go wrong. Inevitably, lots of things will go wrong. Because of this, the best startups are designed in ways that allow them to tolerate as many potential points of failure as possible.

A useful example of how and why to design startups with built-in fault tolerance comes from the way experienced founders make personnel decisions. While an inexperienced entrepreneur might think having one “rockstar” engineer is better and more efficient than having five decent engineers because the one engineer is cheaper and faster, if that one engineer gets hit by a bus — or, for the sake of a happier hypothetical, wins the lottery — your startup is screwed.

A common point of failure

One type of easy-to-spot SPOF for investors is revenue stream. This is especially true for early startups because they haven’t had an opportunity to build a robust variety of revenue streams.

For example, an early startup might have one customer or one partnership providing the bulk of its revenue. Or the startup might be relying on one type of advertising channel to drive sales. From the startup’s perspective, it usually makes sense to focus its limited time, energy, and resources on one valuable revenue stream and make it as successful as possible. After all, why deploy scarce resources to things with questionable value when you’ve got something that’s certain to deliver a high ROI?

However, from the perspective of potential investors, a startup with one primary revenue stream is a huge risk. If something happens to that revenue stream, the company will fail. So why take the chance? Investors are better off finding similar companies with multiple revenue streams even if those other companies are currently generating less cash.

The YouTuber I was meeting with is a perfect example. Yes, he was making good money from YouTube, but he was also completely at YouTube’s mercy. When YouTube changed its algorithms, his audience vanished overnight, and he didn’t have any other way to make money. Why hadn’t he also been building an audience on TikTok or Instagram? Why didn’t he have a newsletter? Why hadn’t he signed long term sponsorship deals? In other words, why hadn’t he built other potential revenue streams to protect himself and his business from the eventuality that YouTube wouldn’t remain a viable source of income?

Instead, his years of hard work were negated in an instant because some strangers at a company on the other side of the country changed a few lines of code. Since he hadn’t properly accounted for that possibility, he was left with lots of bills, and no way to pay them.

If you don’t want to get stuck in the same position, you need to look carefully at your single points of failure. That’s true regardless of whether you’re a social media influencer, a startup CEO, or even someone working a traditional 9-to-5 corporate job. In fact, people with corporate jobs are often the least secure. What would happen if your company shut down tomorrow? How would you pay your bills? How would you eat?

If the answer to those questions doesn’t include, “keep paying the bills with my other income,” then you’re violating the first rule of entrepreneurship, and it’s time to find other streams of revenue. Have you considered mowing lawns?

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