Capturing The Value You Create

“Creating value is not enough—you also need to capture some of the value you create.” — Peter Thiel, Zero to One

There is a difference between the value you create and the value you capture. If you only create value you won’t be able to make a living. If you only capture value you’ll go out of business. Thiel writes:

“For example, US airline companies serve millions of passengers and create hundreds of billions of dollars of value each year. But in 2012, when the average airfare each way was $178, the airlines made only 37 cents per passenger trip. Compare them to Google, which creates less value but captures far more. Google brought in $50 billion in 2012 (versus $160 billion for the airlines), but it kept 21% of those revenues as profits—more than 100 times the airline industry’s profit margin that year. Google makes so much money that it’s now worth three times more than every US airline combined.”

And this is true for everything. You don’t have to be a big business to be a bad business. You may not have a business, and you still might not be capturing a chunk of the value you create.

For example, if you are very diligent at your work, but nobody recognises your contribution, or somebody else is taking all the credit, you aren’t capturing much of the value you create.

You should ideally get back more than you give. If you are a philanthropist, you give away money to help the poor, and you gain back in social capital, name, and recognition. If you are a good deal maker, what you give you get back in margin and profit.

If you simply focus on creating value, you may not be able to do this for a long time. For example, I try to write thoughtful and informative articles to create value for my readers. This does take up a significant amount of my time. It does give me joy. I enjoy the process of synthesising various ideas and packaging them in a digestible format. I like it when somebody leaves a good feedback. These are emotional values that I capture. Through patronage, I also capture monetary value.

But to be able to do this for a long time, the value I capture should be a net profit, in terms of personal energy and money. This would help me focus more on other things, such as experimenting with video and audio formats, rather than worrying about sustainability. But there’s a limit. If you focus only on capturing value, you can’t really focus on creating. If you can’t create, you’ll go out of business.

On any given situation, the primary focus should be on creating. At your workplace, your primary focus should be on doing good work.

For a founder, the first job is to build, and second is to sell. Not the opposite. And if you know how to build, you can learn how to sell. Similarly, if you create value, you can learn how to capture value.

Capturing Value is an important mental model that can help you rethink your efforts and, if necessary, help you point them in the right direction. More than often, we get too engrossed in our efforts, and forget about the outcome completely. But diminished outcome is not sustainable in the long run.

The value we capture doesn’t necessary have to be money. There’s joy, fun, and good will as well. Your hobbies may not pay you back, but they do help you get better at other things.

There are certain things which are first-order negative, and second-order positive. Reading books is a chore for a lot of people. It was a pain for me as well. If you force yourself to read, you don’t get anything back in the short-term. It doesn’t give you joy.

But reading does pay off tremendously in the long run. If we take a step back and look at it, in the long-run, books actually help you learn how to create value in almost any field you are interested in, thereby enabling you to capture value as well.

Similarly, a lot of Silicon Valley startups lose money in the short-run, but in the long-run, they intend to make 10x more that that. They are giving up on capturing value at present to be able to capture 10x more in future. When you are staring something new, there might not be immediate returns. As long as you are not going over budget in terms of time, effort, and money, it’s OK.

At a new job, you can’t expect your peers to know your value on the first day itself. It takes time. Similarly, you can’t expect to be paid for your first photo, you first art, or your first video. There’s a bit of struggle involved in order to communicate your value to society.

But if you do your job right, if you create value for society, and society recognises it, society starts owing you. Suddenly that first photo, that first art, and that first video is worth much more than it used to be. When society starts paying you back, you start capturing value even when you’re sleeping.

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