Creating Value

I have heard many times that the key to a successful business is to “create value”. While there is truth to that, it seems inadequate. Moreover, the ways in which it is inadequate have significant implications for the types of businesses one should start, the skills one needs to be successful, and the nature of our market system as a whole.

To my mind, there are two important clarifications here.

Value for Whom?

First, I actually don’t think our capitalist system rewards those who create value; it rewards those who create value for those who have value to give in return.

This can be most obviously seen in consumer brands. Apple and Starbucks are two of the most valuable brands in the world. Why? I would argue it’s because they target more affluent consumers for whom the marginal opportunity cost of that $3,000 computer or that $5 latte is not that big.

This reality has real consequences for the types of businesses that get started, funded, and succeed. Most people would probably agree that a business that helps uneducated, unemployed, single moms improve their parenting skills is ‘valuable’. But that’s not necessarily an easy business to start because – even if the moms wanted it – they don’t have the money to pay.

Now of course that business could attempt to sell its services to the government or a non-profit — or even get sponsored by a corporation – but this really is just the same thing: convincing the group that has value to give that you are providing a product or service that they value (even if they’re not the direct recipient of that product or service).

Creating Value vs. Capturing Value

The second clarification I’d like to make is the ability of a person or an organization to create value vs their/its ability to capture value. It took me a long time to realize that these are not the same thing, and that the skills/capabilities required are often quite different. Moreover, for the purposes of becoming financially successful, I would argue that being able to capture value is more important..

Let’s say you’re a brilliant developer. You’ve worked for years developing this algorithm that solves some massive problem. And just last night, you finally got it to work. You’re telling some guy about this at a party, and he’s super interested. In fact, after some more discussion he agrees to pay you $500K for your work. $500K! You gladly take the money, and at tax time gladly pay your tax bill on that income when the time comes.

Meanwhile, this guy takes your algorithm, forms a corporation, and then turns around and goes and licenses it to big company. He’s a great negotiator and manages to get a $1M license fee – non-exclusive, of course – per year. And come tax time he’s got a bunch of business expenses to pay — marketing, business-class travel, etc., and leverages his disregarded entity’s self-directed plan to make large, pre-tax contributions to his retirement account, allowing him to reduce his tax bill significantly.

Who created the value here? Who captured it? Are the skills and knowledge required for each the same?

There’s obviously a lot to discuss here. Even my example is far from perfect in illustrating the distinctions. Perhaps I’m even thinking about it the wrong way. But they seem like important distinctions to consider.

Systems of Poverty

Several years ago, I participated in the AdvancingCities Initiative run by JP Morgan Chase – cities and/or regional groups were to propose projects that addressed one or more of several key ‘focus areas’ for the initiative, all generally based around improving the major cities within the region. As I am based in St. Louis, I got involved there.

E2E: Education to Employment

My particular proposal was the development of an ISA-financed “Education to Employment” pathway where various stakeholders (i.e. government, employers, schools and non-profits) would coordinate their activities to provide educational and other support services needed to help folks from low-income backgrounds get living-wage jobs. These investments would be financed by an ISA, where the student would start paying back a percentage of their income once they started earning over a threshold amount. The proceeds from this payment would then be divided across the various organizations within the ecosystem according to an agreed upon formula.

It was my hope that this would provide an economically sustainable way to continually reinvest in our communities.

Mapping the System

My proposal wasn’t chosen and we ended up going in a different direction. But in the course of those discussions I learned a lot about the causes of poverty and the feedback loops that often make it very difficult both to escape individually and/or address systemically.

When faced with complex problems like this, one of the things I like to do for my own sake is to develop what I call “causal maps”: basically simple digrams that map out the cause-effect dynamics at play.

The way to read the maps are simple – it’s mainly [Cause] –> [Effect]. I find that doing this often helps me distill a lot of complexity down into something that I can understand, while also highlighting the interconnected nature of the problem.

Draft effect map of poverty
Draft Cause-effect map of poverty

Above is an example of a simple one I created to understand the dynamics of poverty. Now I certainly don’t claim that this is complete or that I am any type of expert. I am mainly sharing in case others find it interesting and to encourage trying this mapping approach and see if it works for them.