‘That is the death’: Mark Cuban says ultra-rich and famous Americans get lured into money pits like music labels, clothing companies — here’s his investment advice for steady gains

Here’s why the serial entrepreneur doesn't recommend these glitzy business ventures with "no barriers to entry."

Barriers to entry

Cuban's advice to people with lots of money to invest is to hire somebody to manage it. "It cannot be your friend," he added. "It's got to be somebody who's done it for big time people."

His skepticism about clothing labels, restaurants and liquor brands stems from the fact these industries are simply too easy to get started in. “[Do] you know one athlete’s label that’s done any good?” he asked Sharpe, who admitted he couldn’t name a successful example. “You know clothing companies? ... It’s hard. Those businesses are hard because there’s no barriers to entry.”

According to the Corporate Finance Institute, a barrier to entry — such as government regulations, licensing requirements, technological challenges or intellectual property — can limit competition and allow companies who overcome the barriers to enjoy better profitability.

The weight-loss drug Ozempic is a good example. Pharmaceutical giant Novo Nordisk has spent billions of dollars developing the drug’s patent, getting it approved by the Food and Drug Administration and building manufacturing facilities. Only a handful of firms can match this level of resources, which means competition for the drug is sparse. Novo Nordisk has seen sales and profits surge since the drug launched.

In contrast, launching a clothing label or restaurant requires significantly less investment, expertise and regulatory approvals. Nearly anyone, regardless of experience, can launch one and it's hard for investors to know if the product or business is special enough to stand out and succeed. Industries overflowing with competitors limit the pricing power of even the best players.

The average profit margin for a full-service restaurant, for instance, is between 3% and 5%, according to Indeed.