The best start-ups, we at Kepha think, are the ones that have or can achieve “optionality.” Optionally creates founders’ freedom.
Without it, you’re hosed. Here’s why.
Optionally exists when you have a repeatable and scale-able revenue model. With that, you can forecast revenues, which is the best form of financing available: non-dilutive cash.
When you can forecast cash coming in, you can then manage cash going out in the form of expenses. So, you can then forecast profitability.
Now, you may choose to delay profitability by investing in growth. But, the entrepreneur has now achieved the option to be profitable when he wants–or, to step on the gas and up the burn to grow faster. The dollars are being put to good use. The business is scale-able. You’re not artificially buying growth.
With optionality comes freedom: the entrepreneur raises more venture money, or exits, only at terms that he wants. He has the power to say “no”.
Optionality also gives downside protection. When the stock market crashes, companies with optionality can then reduce their burn, become profitable while still growing, and are not held hostage by VCs. That’s a wonderful thing.
Our company OwnerIQ has optionality. My partner Eric Hjerpe seeded it and is very tight with the management team. The company is growing insanely fast (16x past 12 months). Moreover, the growth is predictable and scale-able. The revenue model works. The company can be profitable whenever it wants, but the team has chosen to step on the gas and invest in growth.
But, they control their own destiny. They have optionality. That is how start-ups can become large companies.