Value creation and value capture

Business models matter, our SMB summit, tech for abundance in NY

Value creation and value capture are two totally separate questions and largely independent of one another.

• Create value: the product that changes the P&L or otherwise increases surplus/utility for your customers.

• Capture value: the biz model wrapper, capital structure, and path to market that drives equity value

These are independent variables but tons of time and money gets poured into the ground/wasted when the two are conflated. Success in one does not guarantee success in the other; there is no natural reason creating and capturing value go hand in hand automatically. That is, business models matter.

Software is a way to create value but, to borrow from Sam, “software is a great business tool, not a great business model.”

So we want to evaluate biz model and product independently. This is one of the primary distinctions between seed and pre-seed:

• Often at pre-seed we’re thinking through value creation without needing to hard commit to a path on value capture. “Merely” (and it’s no mere thing) creating for customers through product is enough to justify staying in the game testing the next hypothesis on value capture.

• At seed we need a testable plan for value capture such that the bet is actually economic and valuable outside “the lab.”

Value capture without value creation is just extraction (private equity or monopoly). Value creation without value capture is un-economic and unfundable (art projects).

I have some version of this convo with super early (often pre-idea) founders about how they can think through ideas in steps rather than all at once.

I might seem obvious but it’s correct:

1. The arc of history: understand the past, predict the future, identify the catalyst to make it so. What is the vision of the future propelling you forward?

2. Value creation: what product do you want to build and how much value can you add to the system?

3. Value capture - what biz model to wrap around that product?

4. Capitalization - how do you fund this vision into reality? Of course, not every great business is a venture funded one. And increasingly not every venture funded business is solely venture funded, at least not over its full life.

This also lines up well with how I think about investing in companies.

As startups are getting weirder and entering more of the real world and real economy, it is increasingly important to separate out secular trends, value creation, value capture, and long term capitalization as independent variables.

SMB Summit

This week we hosted ≈100 founders, operators, and investors working on companies in the real economy and small businesses. Our panelists included the CEOs of Teamshares, Moxie, Baton, Area2 Farms, and Brad Hargreaves (founder of General Assembly and Common), and Michael Garrison (head of innovation at Chick-fil-A).

We asked them “What would you like to see get built? What would help you, your customers, or independent businesses generally?” Here’s what we heard:

1. Training/coaching for owners: franchises have this built in for there’s much more to do helping coach, teach, and mentor business owners. It’s a great way to differentiate software.

2. Embedded/headless/configurable CRM: CRM is upstream of marketing which is upstream of revenue. So it matters but its hard to use and generally sucks in these categories. It should just live in my SOR and not suck.

3. Receivables/working capital: mid market and PE backed companies have easy acess to LOCs for working capital. Smaller companies often have to keep tons of cash on hand which limits their ability to grow.

4. Hard asset capital formation: getting in front of VCs is easy but getting in front hard asset (RE) investors is not. There’s no great user experience, tight networks, etc. to make raising money for smaller projects viable and repeatable which drives CoC and kills projects.

5. Unified/aggregated messaging: between frontline workers on one side and HQ staff and customers on the other, owners are stuck in messaging all day. Help them clear the queue faster and not miss things.

6. Permitting and compliance support: this is where small businesses, especially anything touching the built world, go to die. Speed it up and keep them compliant.

If you’re working on any of these, we’d love to chat and see how we can help plug you into the right opportunities.

I Read

Venture and Media - Byrne Hobart

The Rise of Production Capital - Brett Bivens

New, weirder/compound/hybrid/real world businesses need new kinds of capital partners. Many people are saying:

These hard asset businesses are increasingly built and valued on bundles of cash flows rather than revenue multiples, requiring an entirely different approach to capital formation across the company lifecycle. And while several early movers have begun to break through, the holistic financing models best suited to systematically support and scale this model remain fragmented and underdeveloped.

The most valuable financial innovations that grow out of this era will mirror the significance of this macro wave and the ambitions of the companies riding it, not merely creating efficiencies or engineering marginal returns, but fundamentally realigning incentives and reducing friction in capital formation to address these new structural realities.

Sunflower Capital, Led by Sequoia Alum, Collects $150 Million - WSJ

Liu is a friend and a co-investor and I’m just stoked for her to have this closed and launched. She’s phenomenal to work with and I really look forward to working with her more over the coming years.

Abundance

I spent some time this week with both Derek Kaufman from Inclusive Abundance and Ryder and Catherine from Abundance NY. It’s amazing to me how much potential energy there is in these ideas and I’m excited to help bring my community further into the mix. We need more good things and the state capacity to accomplish our goals. Everything else (energy prices, technology development, affordability, clean air and water, etc.) is downstream of that. Time to pull the lever.

ANY recently released another round of candidate endorsements for the upcoming NY elections. There’s so many races and candidates to track you really can’t figure it out on your own (at least I can’t!).

And if you’re not already a member of ANY you absolutely should become one. I’m working with them to plan some really cool tech/startups/venture X abundance events for this summer. Join ANY to get on the list and/or let me know if you want to stay in the loop.

I Wrote

• Value creation vs value capture

• SMB request for startups