Small business owner: Are you dedicated to value creation or value capture?

Yesterday, I listened to a podcast that crystallized for me what the problem has been in much of American business over the past few decades. In the podcast,

John Harthorne, CEO of MassChallenge, was interviewed about what led he and his co-founder to start MassChallenge in 2009. If you’re not familiar with it, MassChallenge is the largest-ever startup accelerator; it uses a competition format to give away $1,000,000 of financial support each year plus $9 million of in-kind support in the form of office space and services to early stage entrepreneurs.

Harthorne really got my attention with the idea that he said prompted he and his partner to start the accelerator. He said there are two parts of the business equation: creating value and capturing value. You create value through finding solutions to problems that need fixing. In return you can expect to extract value at some point in the form of profits. But in recent years, he posits, American business has focused too much on value extraction rather than on value creation. People, he says, have been too focused on how to maximize their own profit and not giving enough focus on creating solutions to problems.

I immediately thought of the dotcom bubble. VCs were throwing millions of dollars at companies that had vague ideas that didn’t solve any real problem, with people on both sides hoping to be instantly rich.

I encourage you to listen to the podcast and hear the rest of what John has to say, which certainly resonated with me, especially later yesterday when I happened to read a profile in Time magazine of an entrepreneur who is very clearly dedicated to creating value and as a result, his company capturing value far beyond what is typical of his industry. (I’d love to share the article with you, but Time doesn’t allow that on their website…bummer. But if you subscript to Time, be sure to check it out; it’s in the July 23  issue.)

The article was about Steve Ells, founder of Chipotle, the burrito chain that is taking fast food to whole new levels in terms of quality and profits. Ells’ restaurants are focused on sustainability, which means the ingredients and methods of preparation they use tend to cost more than is typical of the fast food biz. Yet, Chipotle’s restaurant-level margins are about 26%, among the highest in the industry. And despite the fact that the average customer tab is about double what people usually spend at McDonald’s, for example, the growing chain is hugely popular, with revenues tripling since 2006.

The company’s stock price has risen 800% since the company went public. So Ells seems to understand that value creation is the way to go and value capture will naturally follow.

You can download the Harthorne podcast here. I think you’ll find it as thought provoking as I did. And please ask you self this important question: Are you motivated by value creation or by value capture? Value creation leads to customer loyalty. It also leads to employee loyalty because people like to work at a place where they know something good is being created. Value creation is sustainable; value extraction, not so much. It’s an important distinction and I thank John Harthorne for sharing it.

Hats off for the fine interview to my colleague Andre Taylor, who along with me, consults with the National Association for Community College Entrepreneurship, which hosts this podcast.

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