The Dirty Secret of Entrepreneurship

The dirty secret of entrepreneurship is that, to be successful as an (for-profit) entrepreneur, you need to excel at something that is useless in itself. In short, to be successful you need to excel at capturing the value you create. While, value creation can be productive for society, the efforts needed to capture value are, in themselves, unproductive. They are “the business model” or “a cost of doing business” – to use a few euphemisms. Here’s perhaps why.secret

The first thing I’ve recently learned is that, to be an excellent entrepreneur, you must excel not just at creating value you must also excel at capturing that value as a profit for your company. To be explicit, an excellent entrepreneur is someone who not just creates, say $1B in value, but who manages to capture a very large portion of that revenue as profits (say $999M, then you’d be a pure class entrepreneur). By contrast, one way to be an excellent scientist (just one example) is to create massive value; capturing that value for yourself is much less of a feature. Stop for a second and think about the difference… I take no credit for highlighting this difference, nor am I sure who should. Peter Thiel in Zero to One emphasises how entrepreneurs focus too much on the size of the opportunity and not enough on how much they will capture as profits. Bill Aulet, in Disciplined Entrepreneurship, makes the point that too many entrepreneurs spend lots of time on value creation and not enough on value capture. Overall, the emphasis on value capture makes sense to me too. To get massive funding upfront for a startup, it’s not enough to create value in general, you need to be sure that you can capture that value and do so in a durable way over time.

The second thing I’ve recently learned is that capturing value takes a lot of effort. Actually, I’m definitely spending more time on value capture than on value creation. Figuring out a strategy to capture value, writing patents, keeping trade secrets takes massive resources – I can only imagine that efforts to capture value will increase and not decrease in time. This fact surprised me – I thought startups were all about value creation. Value capture just seems strange, perhaps indirect?, perhaps uncomfortable?; and maybe that’s why not enough entrepreneurs do it effectively(?).

The last thing I’ve learned is the reason I wrote this. Focusing on value creation has made me realise one of the virtues of being a non-profit or being in education. For sure, non-profits, governments and educational institutions have massive challenges of their own that are frequently documented. However, one thing they don’t have, at least to the same extent as entrepreneurship, is the need to spend massive resources on value capture. As an entrepreneur, I think it’s important to respect that.

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2 thoughts on “The Dirty Secret of Entrepreneurship

  1. Hey Ronan,

    Thanks for the new perspective. You’re right… Since my first startup I only focused on value creation with the assumption that the market would be willing to pay a reasonable price. However, “Value capture” seems to be more important if you want to build something sustainable.

    Value: $100 in measurable value
    Charge: $10

    Value: Intangible (i.e. confidence, leadership, dancing)
    Charge: What the market will bear by testing different price points.

    If we took your marketing article(on NEWater) further we could increase the perception of value and thus charge more because of our better positioning.

    To create a common language we can see
    Supplier perception of value – aligned with value creation
    Client Perception of value – aligned with value capture

    You may be interested in a video I made a long time ago: https://youtu.be/rM5W1Z6tGVM

  2. Nice Ulrich, I think your point on increasing the perception of value is a really good one. I read SPIN Selling by Neil Rackham and his research shows that getting the client to understand and state the value in their own terms is the most powerful way to conduct large sales (say >$10,000). Apparently, for smaller sales it is less important to spend time teasing out implications and payoffs of the solution but still good.

    Thanks also for your video. It’s only recently I’ve started to realise the importance of the client’s perception of value. All during my education I had things the wrong way around. There’s a tendency, I feel, in engineering to focus on reducing costs and not on increasing client value.

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