I just read a terrific book called 'Sapiens: A Brief History of Humankind' by Yuval Noah Harari and it got me thinking about the society that we live in today and the notion of creating "value" in the context of start-ups. What does it mean to create value? In which areas of business and technology should we focus our capital? Who is truly creating value and who just looks like they are? For much of human history, there was little growth or prosperity. It wasn't until 1500 when the modern technological age hit where we started seeing some real GDP. 500 years ago GDP was something like $250 billion in absolute dollars. Today, it is $60 trillion. Of course, population grew exponentially in that timeframe, but GDP per Capita tells an even more pronounced story. While relatively flat at $400-500 per person from 0 A.D. to 1500, GDP per Capita has spiked to over $6,000 today, more than 10x! What has caused the productivity of every human to increase tenfold?
The answer is much more complex than can be covered in this post, but in his book, Harari argues that capitalism and mass consumerism enabled humans to finally achieve incredible and long-lasting economic growth. In effect, earlier in history there was no concept of growth and "expanding the pie". Prior to 1500, hardly any lending or investing took place because everyone assumed that the overall pie was a constant, that is, if you were making money you were probably just taking it from someone else. As a result, people weren't willing to lend or invest into new businesses. This all changed after 1500.
Take the example of a baker, a contractor and a lender. In today's world, the baker may seek investment to build a bakery to sell bread. The baker finds a willing lender who then invests $10,000, charging a healthy interest rate for his troubles. The baker then pays the contractor $10,000 to build the bakery, and then the store is open for selling bread. In this scenario, a market for bread is created and all three parties earn money which can be used for disposable income. Continuing with this example, suppose the baker wants to outfit his bakery with new technology to sell a never before seen product, croissants. Borrowing another $10,000 to pay the contractor yields not more bread output, but an entirely new market of croissants. The lender made interest on the $20,000 and the contractor made $20,000 in contracting fees, and both of them can afford to buy bread AND croissants. The baker obviously enjoys having a diversified bakery with fast growing revenue and everyone wins. That is the essence of wealth creation.
This scenario would not have happened prior to 500 years ago. The lender would not be willing to invest because he didn't believe in a future growth story. It wasn't until the advent of colonialism and the great sea-faring expeditions of the 1500s when people started to realize that the pie could grow and everyone could prosper.
Fast forward to today. The businesses that generate the most "value" are the ones that grow the pie for everyone. They are businesses that are either fixing broken problems in existing markets to make things more efficient, or better yet, creating a new market entirely. Uber was initially serving a $10B taxi market, but they revolutionized transportation in the process which created a brand new market that grew the pie for everyone involved - consumers spend more, drivers earn more, and transportation is more efficient because of it. Facebook created a brand new way for people to interact with one another thereby creating a "social graph", and as a result, countless parties have built businesses on top of the platform creating a sort of self-contained hyper-growth ecosystem. Both of these are examples of true value creation (which is clearly why investors love "platforms").
Some investors and start-ups fail to see the other side of this. If a business is cleverly re-arranging economics in an existing market without fixing any real issues, or offering a marginally better service in a competitive market, then it is probably not creating much value. Value creation is essential to driving growth in our society today so let's keep innovating!