Recently I’ve been thinking about what creates multiples of value in a business.  In other words, why one company is more valuable than another company even if they each have the same revenue and same growth rates.  Obviously revenue and growth are the big dogs that drive value, but I’ve been thinking about what multiplies that revenue and growth when it comes to valuation.  One concept I’ve been kicking around is the notion of optionality.

All of the more successful companies I can think of have created something that extends and amplifies thier core business with options of what they can offer their customers.  This isn’t the same thing as the core value they offer customers, but rather the options their core created by developing that core value in a way that’s extensible.

A couple of examples:

1. Wells Fargo

It could be any bank, but my wife and I happen to use Wells Fargo for most of our day to day banking.  WF made a connection with me by having a local branch office and pretty decent customer service.  I don’t go into the branch much anymore, but the options I consume from them are increasing.  Once the customer connection is made, they now have the ability to offer me mortgages, car financing, stock trading, retirement accounts, financial planning services, etc. 

2. Comcast

Pipes.  That’s mostly what they have.  I have 1 pipe  into my house now which has phone, internet, and TV.  TV isn’t exaclty a fair description, because its really access to what used to be just broadcast, then cable, then premium cable, and now OnDemand, movies, a DVR, an iPad app, etc.  They laid the groundwork and now they have the optionality in their business to layer on more services and products.

3. Apple

Obviously they make MP3 players, laptops, desktops, phones and tablets.  But the creation of the App Store/iTunes is the optionality magic.  They now can give me options to buy music, video, books, applications.  They have my credit card on file in the App Store and I can consume until I couldn’t eat another bite. Now they’re threatening to give me a bunch of cloud storage options so I can continue consume more and create more.

Of the 3 examples above Apple is the most "locked in" model.  I think they only reason they get away with it is vastly superior user experience coupled with fair pricing.  In the other cases  I’m free to use an alternative provider with little to no switching costs.  The point I’m trying to make here is that the companies above have captured better than most the notion of optionality in their business models.  They each have a core and then can extend that into adjacencies.

I think about this in the context of the company I work for, Lijit.  We started out by working on the simple idea of helping online publishers better develop a trust bond with thier readers.  This straightforward idea led to the development of tools, technologies and components to help publishers better engage and understand thier readers.  Over time it gradually evolved into a more complete platform.  A platform that was designed from the outset to simply help publishers.  By focusing on this clear and consice publisher-centric core value, we now are rapidly expanding our optionality as a business.   Whether a publisher wants to better his trust bond with readers, or engage readers more, or understand his readers more, or perhaps even make money from his publication.. we help; with options.  We don’t have to develop or "own" all the individual offerings.  Instead, we’re free to work across a wide spectrum of partners in each of the areas of engagement, trust, understanding, and money.

Any startup business has to start and end with a relentless customer focus.  That’s the core I mentioned above.  Without it, you’re toast.   But in order to build something that has a meaningful multiple of value that same business has to also build something that has baked in optionality.


After I wrote the above I got to thinking.. the whole optionality thing is sort of like a Swiss Army Knife.  It has a lot of options available: tweezers, toothpick, corkscrew, leather punch, and of course a knife.  But it’s the knife at the core that the options are built around.  A set of options without a core value isn’t worth crap.  After all, that’s why its called a Swiss Army Knife…