Tag Archives: options

Where Is The Value In A StartUp?


“That’s risky, isn’t it?”

I don’t know if this is true but I think people see risk as 2 binary outcomes – ZERO or ONE.  Either they’ll see something as very risky or not risky.  This is one of the main reasons why entrepreneurs tend to be pig-headed about what they’re pursuing — this has its advantages but reality checks are also necessary.

Back to the question… what is everyone missing?


A startup is a portfolio of options — that’s what gives a startup all of its value.  Potentiality is not worthless!  Amazingly, people don’t see companies investing in training and development as worthless — that’s creating optionality too.  (Side note: we are domain-specific — ask a sky-diver if jumping out of a perfectly good plane is risky).

But, why are some startups able to raise a ton of cash while most don’t?

The main reason is marketing but let’s leave that aside for the moment.

The answer is another question… Does this startup have the capability to realise the potential.  Or in options language… will the option(s) embedded in this startup ever be In-The-Money.

And the single biggest determinant of a start-up ever realising its potential are the people behind these options.  People determine the likelihood of a business or project ever becoming In-The-Money.

Investors back people, not just ideas.

This also explains why a company with no profit can have an ever-increasing market value.

Power Of Mistakes

Errors, mistakes, miscalculations, stuff-ups, failure are a necessary part of growth, not just in business, but more generally in life.

Without mistakes there is no learning.  It’s the critical feedback loop that allows us to adjust our course of action.

Mistakes also allow us to not get stuck.  We will never have all the required information to make the best decision — every major decision is most likely not going to be black or white, but grey.  Many shades of grey which can cause paralysis.

Paralysis costs time — truly our only non-renewable resource.

The best way to proceed is to either take a small bet, or a number of small bets, and let the results dictate the next course of action.  This is a far superior way to deal with uncertainty then taking a long term view — in this case bottom-up beats top-down.

Mistakes should be celebrated as long as they do not sink the ship, i.e. actions can be seen a call option.

Options increase value because they increase choices that will be available to us in the future.

Why do some companies such as mining exploration, Web 2.0 or biotech companies command multi-million or billion dollar valuations when they have never made a single cent in profit (and sometimes even revenue)?

That’s right… options!  In other words, exposure to a massive upside.

Whether in business or life, don’t be afraid to make mistakes — they increase choices available in the future and means exposure to potentially very lucrative or profitable opportunities just like a biotech company.

One more thing… mistakes are essential for innovation but more on innovation in a future post.