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Insightful tweet from Charles Hudson:

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?

  • http://www.tagged.com Greg Tseng

    Two examples:

    Craigslist creates way more value than they capture and I think it’s just because they don’t care about making money and thus leave so much of the site non-monetized.

    Scammy offers — currently including teeth whiteners, make money on Google, and Acai Berry weight loss — capture (extract?) value without creating any.

    I believe there are three classes of companies:
    1. Create > Capture – elite companies, that create way more value than they capture and still build a big business, e.g. Craigslist
    2. Create ~ Capture – most companies, that sell things for roughly what a buyer values them at, e.g. a grocery store or restaurant
    3. Create < Capture – scummy companies, that extract value from people without providing any real value and sometimes inflict negative value, i.e. the scams of the day

    We should all strive to be in the first class. Andrew Chen blogged about some of this:

  • http://entrepreneur2leader.com/ kevin

    good article.. very interesting… I would like to prefer this book, which I personally found very useful in developing and understanding different entrepreneur traits… A good book for young entrepreneurs who are willing to start their own business…

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  • Mark

    What book?

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  • Prakash

    worth a read, very usefull article. Thanks.

  • http://amygu.blogspot.com Amy Gu

    From creating value to capturing value, the company needs to have a fairly-high entry carrier to achieve it.

    From capturing value to creating value, the company needs to be able to transform itself to be innovative.

    It’s easier for VC to see the first part, but not the second one.

  • http://www.harrr.org/rrr/ simo

    I think that all the actual bloggers who share thoughts for free are giving some kind of value without capitalizing on it, until they do something so strong that can be remembered from readers. After they got into their readers mind, some of that value starts to get captured since the readers will give importance to the blogger’s thoughts. Anyway value can be knowledge, knowhow, services (online or software), life experience.

    Also all these phenomenons that got beyond their tipping point are generating value for their environment, and they can capitalize only if they have a good control on the same environment (direct or indirect).

  • http://www.point2.com/ Zach Scott

    Good products create value. Good biz models capture value. Good companies have both

    great companies continuously improve both

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