The 12-Month Rule: Why We Shut Down Unprofitable Companies

Capital is a tool for amplification, not discovery.

At Second Order Ventures, our incubation strategy is "Rare by Design." We only build when we control the demand and can enforce a strict EBITDA mandate:

The 12-Month Rule

Every incubated company must reach profitability within 6-12 months or it is shut down.

This isn't harsh. It's disciplined.

We don't fund "experiments." We build infrastructure assets that are software-first, modular, and governed from day one.

Why This Discipline Matters

Technical Debt Becomes Financial Debt

Most startups accumulate technical debt in the race to product-market fit. They ship fast, iterate faster, and promise to "clean it up later."

Later never comes.

Technical debt compounds into:

• Operational debt: Manual processes that should be automated
• Compliance debt: Governance gaps that become regulatory incidents
• Financial debt: Burn rate that exceeds revenue growth

The 12-Month Rule prevents this. If you can't reach profitability in 12 months, your unit economics are broken. No amount of capital will fix that.

LP Capital is Protected by Cash Flow, Not Hope

Most venture funds ask LPs to invest in a "portfolio of bets." Some will succeed, most will fail, and the winners will return the fund.

We don't operate that way.

Our LP capital is protected by:

• EBITDA discipline: Every company must be cash-flow positive or have a clear path to profitability
• Majority positions: We control the roadmap, burn rate, and exit timeline
• Structural certainty: Governance is engineered from day one, not bolted on later

Discipline Compounds Into Durable Returns

The 12-Month Rule isn't about being conservative. It's about being selective.

When you only build companies that can reach profitability quickly, you:

• Avoid capital waste on experiments that don't work
• Compound returns faster (profitable companies can reinvest their own cash flow)
• Attract better talent (people want to work on real businesses, not science projects)

Current Portfolio Proof

Our portfolio companies demonstrate this discipline:

• Taalk.ai: 60M+ monthly throughput, EBITDA-positive AI communication platform
• Policy Connectors: Cash-flow positive insurance data infrastructure
• CMG Marketing: Profitable marketing operations at scale

These aren't "growth-at-all-costs" companies. They're infrastructure businesses that generate cash flow from day one.

The Rare by Design Philosophy

We don't incubate often. When we do, we control:

• Demand: We only build when we have confirmed customer demand (not hypothetical)
• Economics: We model unit economics before writing a single line of code
• Governance: Compliance and risk management are engineered from day one

The result? Companies that reach profitability in 6-12 months, not 5-7 years.

Our LPs Invest in Discipline, Not Hope

The 12-Month Rule is a promise to our LPs:

We will not waste your capital on experiments that don't work.

Every dollar invested goes into infrastructure assets with proven demand, clear unit economics, and structural governance.

This is second-order thinking: Discipline today compounds into durable returns tomorrow.

---

Ready to think Second-Order? Explore our portfolio or schedule a Fund I conversation.