Optionality

Through the life of a startup, from the earliest days through scaling the business, the more options available to a founder the better. I saw this firsthand in my time at Answers.com, Sphere and Outbrain. It was also true for us at Aol (though that wasn’t technically a startup). When we spun Sphere out of Aol and sold the company to Outbrain, interest from multiple acqirers helped get the deal done. Optionality is always on the founder’s side.

I find that one of my most common refrains when talking to founders is encouragement to "maximize optionality”. There are several things a founder can do to optimize for this and I’ve seen that for the most talented leaders, optionality serves as a sort of underlying system of governance for decision-making. The below list is by no means exhaustive:

Stay nimble until you nail product-market fit. It’s amazing how much things start to slow down when a company grows. New ideas aren’t as plentiful, bad habits exacerbate, more time is invested in management of people vs getting stuff done. And of course, burn rates are higher so missteps are more costly. Everyone who has lived the startup life for any period of time has experienced this. If a business is still pre product market fit, it becomes that much more difficult to find it. My advice is stay lean and nimble as long as possible. Do more with less. Many founders are eager to grow and show the world what they’ve built, but by resisting this temptation without sacrificing growth, you preserve optionality and this pays off in spades.

Don’t hold on to subpar hires. This deserves it’s own blog post and I plan to give it its due in the coming weeks, but the size of the team is often inversely proportional to optionality. Keeping subpar talent drags everything and everyone down, while contributing to the lag I mentioned in the previous bullet. In addition to other toxic effects, holding onto subpar talent is headcount growth for the sake of growth and only serves to drag down efficiency and optionality.

Minimize fixed costs and long term obligations. Things like long term leases on office space, contract exclusivities and revenue guarantees can provide a quick pop for a business, but can also severely limit options down the road. To their credit, one of our companies is 40+ employees and still working out of WeWork for the flexibility it brings. At one of my prior companies, we offered significant revenue guarantees in exchange for long term partnerships. These work as long as margin stays healthy, but can be painful if margins compress.

Plan 18 months ahead. I advise almost all the companies with which I'm involved to have an 18-month plan. It can take as many as six months to fundraise and you don’t want to be fundraising with six months of gas in the tank because that gives investors all the leverage. Forecast ahead to where you want the business to be. If you plan to fundraise in 10-12 months, how do you want the business to look? What steps are required to get there? Finally, master your decision tree. If you reach your goals, you execute on the plan, but what if you come up short? What is the backup plan? Know your options at every stage.

Nurture relationships with potential acquirers. I learned this lesson from a mentor earlier in my career and it’s one of my favorites. For most businesses, there are a handful of logical acquirers. These are "special relationships" that should always be kept warm and, ideally, should get warmer as your company grows. If you’re running your company unprofitably, you can never be certain when funding might dry up. If early growth exceeds expectations, there’s the possibility of an irrationally good acquisition offer. Nurturing a handful of these relationships increases the number of options available. I believe it pays to identify these people early in a company’s life and invest in these relationships on a regular basis.

In the current economic climate, as funding could become more challenging for some businesses, maximizing optionality is even more important. Having more than one option almost always benefits the founder. In my experience, sometimes what seems like the second best option at the time, ends up looking pretty darn good in retrospect and having multiple choices creates this possibility.

By Josh Guttman

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