Good Business Practice
What We Capture & What We Create
I was out with a few mates over the weekend having lunch. They’ve recently started a business and it has been gaining momentum. I found myself particularly interested in their changing experience of value creation and value capture. Both of them have mostly worked in secure jobs as trained professionals where they had been creating value. As hard-working, dedicated and capable people, they were creating plenty of value. As employees, they were capturing some of that value in the form of a salary but also in stimulation, recognition and social standing, growth and personal development. Working mostly in education, part of the value had been in the lifestyle afforded and the strong sense of meaning in the work.
Value creation is an important part of any business. We don’t pay for goods or services we perceive to be less valuable to us than their cost - the value of what we’re paying. Value capture is another important part of business because without capturing some of the value we create – at least enough to cover the costs of creating it – a business can’t continue to exist. I remember noticing the slow shift in my thinking when I first started a business and regularly coming across advice about value capture. It’s not an insignificant change to go from creating value in excess, some of which is shared with your employer, to capturing a little of the value created by your employees.
I remember a chat with one entrepreneur pretty early in the journey whose gold standard he called ‘making money in my sleep’. He had automated and outsourced so much of his business he was almost obsolete. From behind my mountain of endless work I was in awe. Understandably, there are lots of books and articles, podcasts and real-life examples of business gurus refining the art of value capture. A title like Tim Ferris’ classic ‘Four Hour Work Week’ is wonderfully seductive because we’d all love a little more for a little less, and that’s not just the entrepreneurs among us. I can’t think of many people who would turn down a pay rise for exactly the same job or a reduction in working hours for exactly the same pay. Is this good, smart practice or part of a growing field of study in exploitation?
We still think of money as a store of value like stored energy to power human initiative. If I want a chef to cook me a meal or a friend to answer my calls, I must provide them with value. Fortunately, I don’t have to pay my friends to answer my calls, or to cook me a meal for that matter, but we have a relationship - history and trust - and the friendship leaves us both better off over time. When my mates talk about their business with me I want to be a good listener and maybe to share some valuable insights – to be as valuable as possible to them. With the chef, I’m mostly concerned with the value to me; I want a good deal for my money and it’s her responsibility to ensure she is better off in spite of the cost to her. If she’s a ‘good’ business person, she’ll be working smart and charging as much as she can – maximizing the value created. We don’t think about efficiency or increasing the value captured in our friendships - we want the value to be mutual, but we do in business.
Even better than good business is good investments – the ultimate ‘making money in my sleep’. We have a bit of money invested in shares and sometimes these perform quite well. When I notice the investments have increased in value quickly, there’s a part of me that feels more worthy, more productive and more successful. After a particularly good run, sometimes we choose to sell some shares, perhaps to reinvest and occasionally to spend. When we renovated our house recently, we borrowed some of the money from the bank at 2% interest on a 30-year loan. We also used some money gained from selling well-performing shares and some from dividends. We paid the builder for his work who in turn paid his team, contractors and suppliers. Who built the house? Who created the value? Did I have a right to feel productive when they forged ahead one week, or frustrated when things slowed down? …because I did.
If you’ve been holding much of your wealth – your stored and accumulated value – in assets like stock or property over the last few years, these might have appreciated 30% or more per year. At that rate, compounding over just 3 years, $1,000,000 invested would become $2,200,000. Have you become more than twice as valuable to the community? Has your proportion of value to the community increased at a far great rate than your friend or neighbour who is without assets or whose assets did not perform as well? Maybe. We value good choices and good luck. We value capital, which can be redeployed for growth and productivity. In Australia (and many other places), we pay twice as much tax on money earned through work than we do on capital gains - money gained in the appreciation of our assets. What are we really rewarding and why is it so incongruent with what we value in our personal lives?
This period of my life has been confronting and confusing because I’m highly motivated by the desire to create value for others. My business depends on international tourists so it has done woefully in the last 18 months. I can’t take all the blame. Through a mix of good luck, good choices, some significant advantages, some government support and market factors I don’t properly understand, our store of value has actually increased. I can’t take all the credit, but, sometimes I fall into the trap of feeling my value to the community has increased along with it; that my insights are better and my jokes are funnier (not really, I know they’re still shit) - somehow reflected in my stake and not my work. It’s easy to conflate the two, to pretend my stake is reflective of my work but actually, the wealthier we get the less this can be true.
We had many billionaire clients back in the day, arriving to Australia in private jets and spending hundreds of thousands and more on a few weeks exploring the country. They were mostly pretty normal but it was hard to treat them normally. Just knowing someone can deploy billions of dollars at will – the accumulated value of a normal lifetime of effort from tens of thousands of people – makes that challenging. Sometimes we’d share stories with mates, NDA’s permitting, about having enjoyed the same rare air as such and such celebrity or titan of industry as though by proximity we were ok too. It’s a weird old world.
Listening to my friends I remembered learning to be a ‘good’ business person, to create and capture more value with less effort and feel good about it because that was the game. Eventually, when we were managing quite a few people, we learned you pretty much get what you reward. It’s important to think about what that is.