Business growth and value creation go hand in hand. The foundation and premise upon which any successful business flourishes, resides in your ability as a business owner to efficiently create value.
But what exactly is value creation and how is value defined?
In its most simple terms, value is created through work (Proof of work), which can be physical or creative in nature. The goal with value creation for business, is to create value through work, sell or trade it to customers, and capture some of that value as profit.
As a startup, the process of transmuting value creation into value capture usually takes the form of the quest towards product market fit. The internet also now allows businesses to capture value at scale. Decoupling the need for continuous value creation means that businesses can create value in the form of a product or service that can then be scaled to a global market.
In the context of business building, value capture and value creation must go hand in hand. You can be creating huge amounts of value, but if you are not able to translate that into value capture, you most likely do not have a sustainable long term business.
Peter Theil, in his book Zero to One, frames this problem as follows:
“Your company could create a lot of value without becoming very valuable itself. Creating value is not enough—you also need to capture some of the value you create.”
Business growth occurs at the intersection of value creation and value capture. We have spoken before about the importance of focusing on growth and broke down the example of how Facebook did this so well. Facebook’s continuous emphasis on growth and adopting a growth mindset of thinking outside the box allowed them to capture value extremely efficiently, all while expanding the size of their total addressable market.
If you want to create the kind of value that builds a successful long term business, Thiel says you must be unique:
“All happy companies are different: each one earns a monopoly by solving a unique problem... In the real world outside of economic theory, every business is successful exactly to the extent that it does something others cannot.”
Creating this unique value proposition is at the heart of what every startup must strive for. Your proof of work must not be easily replicable, else others could easily copy your model and capture value in the same way.
Software and related services dominate more and more of value creation in an online first environment. The value of products and services today is also being based more and more on creativity. The commoditization of the internet means that the ability to make a living off creative skills has trickled all the way down to individuals at scale. This new passion economy is paving the way for value creation in the future to be based more on economies of creativity.
As Thiel also states in zero to one, without differentiation, you are creating a poor vehicle for value capture.
“The lesson for entrepreneurs is clear: if you want to create and capture lasting value, don’t build an undifferentiated commodity business.”
Optimizing for value capture should be the primary goal for any early stage startup.
Thinking about value capture through the lens of revenue and profit is a helpful metric to utilize.
It is also helpful to think about value creation and value capture as not being mutually exclusive to one another. Ie: innovating around value creation for your business should help to improve value capture, while innovating around value capture should yield increased profits that can be fed back into ideate more innovative ways of creating value.
Individuals and businesses who can create value based upon unique creativity are positioned to yield the greatest value capture with internet first businesses.
The emergence of more platforms and marketplaces that facilitate interaction and growth among sub-niches is also on the rise.
The passion economy will continue to be about creating products and services that are not easily replicable.
Catherine is the head of Operations at Soar.sh, a marketing services agency for growing startups. Soar helps digital companies grow faster with...