GUEST POST BY A100 MEMBER GREGG OLDRING.
Capitalism makes sense to me. In fact, I used to be really idealistic about it. That was before the dot-com bubble.
Business school polished up my capitalist idealism. In 1995, I put my unfinished bachelor of commerce to work and started a business on the “Information Superhighway”. Three years later I sold that business for 3.5x revenue which was 7x the money I had borrowed from my parents to build it.
Then the dot-com bubble really started to grow …and so did my cognitive dissonance.
I had believed that the free market evaluated future profits of businesses, applied appropriate discount rates for the risk involved and came up with reasonable values for what those businesses were worth. That was the theory. Everything I understood about the value of a business hinged on that.
It turned out that the the free market did nothing of the kind. The collective insanity that went on during that time is well documented but here are the quick highlights of my personal experience.
In 1999, the free market decided that it would be a good idea to invest 650x the revenue of my market leading business into new competitors. You’ll note that I said, “revenue”, not “profit”.
I’ve followed the fortunes of those companies since. They’ve all gone bankrupt except for one. That company tried to go public in 2012 but they pulled the plug since they were still losing too much money and their IPO would have flopped. They’re currently on the business version of life support.
Back to my cognitive dissonance.
I came out of the dot-com bubble ahead financially. I had worked for the company that bought my startup through until 2001. I drank their wine. I partied in Paris and the Hamptons. While my friends were still in university, I owned a sweet condo and had a stock broker.
…but I couldn’t kick the jaded feeling that lingered after the bubble burst.
My problem was this: I had been part of a group of people who tried to swindle people out of their money.
It was clear to every business-minded person involved in a dot-com that their business was grossly overvalued but it was against our interest to say so. Instead many a greedy entrepreneur, venture capitalist and investment banker set out to take advantage of this overvaluation as best they could.
Their business plan was simple.
Step 1: Create a shiny dot-com that is full of hope and potential.
Step 2: Sell it before people realize they are full of shit.
Capitalism calls this arbitrage. In business school, arbitrage is awesome! We celebrate it. Buy low / sell high is presented as an immutable law like gravity …yet, I hated being associated with it.
Here was the rub: It directly conflicted with another immutable law, the one that Mom taught me,the golden rule:
Do unto others as you would have them do unto you.
or, said differently:
Love your neighbour as yourself.
I wrestled with this conflict for months before I decided to do a startup again in 2001. This is the credo I adopted that put an end to my inner conflict:
Earn profit by creating value for customers.
As sayings go, it lacks sizzle but it is beautifully simple and it works. Let me unpack it.
“Earn profit” — this satisfies my inner capitalist. If a business doesn’t make a profit, it‘s crap. It won’t last. Payroll will end. The money invested into it evaporates and nothing is left behind. When my business earns profit, I have created an institution that could exist forever (as long as I do a host of other things right!).
“by creating value for customers” —this satisfies my moral compass. When I’ve created more value than I’ve captured (as profit), I can feel proud of the work I’ve done because I’ve nailed the golden rule!
Creating value for customers does something else too. My business builds up defence. As Gary Vaynerchuk says,
“If you give value to someone else first, you have leverage.”
Giving more than I receive builds up emotional capital. Loyalty.
This was my journey. I’ve built businesses Mom can be proud of.
If you’re a fellow founder of a startup, I hope sharing my experience gives you confidence to build a truly great business. Along the way when some jilted VC says to you,
“Well, if you want to have a lifestyle business…”
Kindly show them the door.
You have a business and a life you can be proud of.
Originally published on Medium.