Good products create value. Good biz models capture value. Good companies have both
If a company has a good product but does not have a good business model it is usually because it has not been able to figure out a way to benefit from the value that they create themselves. There are a number of common reasons for this:
1. They don’t create enough value for each user. If the value created for each user is small, it is hard to capture much of that value because of transaction costs.
2. It is hard to identify who will get value from the product or convince them of the value. Even if a lot of value is being created for each user, costs of sales may end up being too high.
3. Many other products create the same value. Competition and substitution limit the amount of value that you can capture from a user to a “market price” which can be lowered by too many alternatives. This is obviously much worse if they create MORE value than your product does.
4. Users expect the value for free. Sometimes this expectation come about because of industry norms (e.g. online content) and other times this expectation is created by early decisions that the company makes.
It is rarer to find a company with a good business model that doesn’t create value. One notable class of such companies are focused on arbitraging new marketing channels, often with a lead gen or direct response back end. These companies often feel more like “projects” than companies in that there is a natural end of life for them when the arbitrage opportunity closes. These can be terrific projects for individual entrepreneurs, but because they don’t create enterprise value in the long term, are not necessarily good investments for venture capitalists.
I prefer to invest in companies that are both creating value and capturing some of that value for themselves.
Do readers have any other thoughts on ways to create value without capturing it, or capturing value without creating it?