Two phrases that often come up in our internal discussion is around value creation and value capture.

I think of this on three levels.

  1. Does a company’s product/service create value? Is the value jaw dropping? Are customer so excited about it that they are telling other people about it and getting them hooked as well?
  2. Does the company’s business model allow it to capture the value that its products are creating? This is not a given. Some companies can attract tons of happy customers, but have a hard time capturing the value that they create. You see this in SaaS companies that have popular products, but market forces limit the amount of dollars they can capture from customers. You can also see this in ecommerce companies, where much of the value gets captured by Google/Facebook and much of the remaining margin is eaten up by shipping, handling, service, returns, etc. A lot of value may be created, but not that much is captured by the underlying company. This is why you often see companies with huge top-line revenue, but shockingly small enterprise value.
  3. We also think a lot about value creation for the enterprise as a whole, especially as they progress from one round of funding to another, or as they think about building value for an eventual sale or public offering. There are tons of trade-offs that founders have to make along the way that are non obvious. Things like optimizing for short term value creation vs. long term, doing stuff that is externally rewarded by investors vs. stuff that is important but will be undervalued, or pursuing the sure thing vs. spending resources on something speculative. Working with founders to pick the best path of value creation is one of the most important ways investors can help, an is where we end up spending most of our mental energy.