Entrepreneurial Value Creation
Reading four business news articles today got me thinking about entrepreneurial value creation or what value entrepreneurs really create. Many measure a company's success by how much money it makes or how fast it's grown. It's impressive to learn about a company that has substantial success in a few years. But, profits aren't the only story. The real value created is sometimes independent of profits.
The first article I read was a feature of Octane Fitness by small business columnist Dick Youngblood. Started in 2001, by 2009, the company had sales of $34 million. The company produces elliptical trainers. This is the sort of entrepreneurial success story I enjoy—companies which innovate, improve, and create a quality product. While the financial success is impressive, there's also a psychological return for entrepreneurs who build such companies. A feeling of pride in the creation of the product. That's an important reason for running a company.
The second article was about Minnesota Attorney General Lori Swanson suing three online payday lenders who, she alleges, charge interest rates exceeding Minnesota law on short-term loans. The lenders say they aren't subject to Minnesota law. No doubt such firms make handsome profits. But, is there entrepreneurial value creation? Are such firms really providing a valuable product or service? Do they benefit the world or the economy? Or are they just a shoddy sort of way to grab a buck?
Such firms often argue they're making short-term loans available to people who wouldn't otherwise have access to loans. I'd argue that offering a $400 two-week loan for a cost of $100 is no service at all. It merely preys upon desperate people. Poorer or financially-struggling people get locked into taking out loan after loan, paying exorbitant amounts in interest, penalties, and fees. It might work out great for the founders of the loan company, but paying exorbitant interest guarantees the poor person won't get ahead. Companies can be profitable without creating real value. Whether there is a personal pride in building such a company depends upon what kind of a person you are. The military has banned such loans to soldiers, and it could be argued shutting down this industry entirely would benefit both the people exploited and society overall. Companies can be profitable, but true entrepreneurial value creation is lacking.
The third story was about a legal decision involving patented human genes. U.S. District Judge Robert Sweet ruled that patents on the breast cancer genes BRCA1 and BRCA2 were inappropriate. Myriad Genetics had discovered the DNA sequences of the genes, but it did not create the sequences, ruled the Judge. Nature or God created the genes, not Myriad Genetics. Myriad charges $3,000 to test women to see if they're likely to get breast cancer. Such tests earn the company about $300 million a year. Several medical researchers have said Myriad Genetics demanded they stop studying the genes. In other words, the company effectively demanded medical researchers stop trying to cure breast cancer because it would interfere with the company's proprietary rights. The proprietary rights: human genes. Without the patents, the costs for such testing would drop substantially.
While being the first to discover a particular gene is nice, it's obvious to most of us that such a discovery shouldn't give a company a proprietary right to the gene itself. While offering such tests is valuable, the company believes itself entitled to far more profits than can be justified by its actual contribution to research. With companies trying to sponge huge profits in such situations and demand proprietary control, it is no wonder America's healthcare costs are astronomical.
While Myriad Genetics created great profits for a small group of entrepreneurs and investors, society would probably be better off if such discoveries were made by universities who kept their discoveries in the public domain. Companies today use "technology transfer programs" to take taxpayer-funded academic research and hand it over to for-profit companies who, then, claim it as proprietary and behave a lot like payday lending companies. They price gouge the end user for services that should cost much less. Changes in patent law can help encourage real entrepreneurial innovation and legitimate competition. Perhaps a company won't earn $3,000 for a genetic test, but maybe it will earn $300 or $30.
The fourth article addressed Amazon's response to Apple's iPad. Amazon produces an eBook reader it calls Kindle. Apple's iPad also allows consumers to read eBooks. Apple allows publishers to set the prices of their eBooks. Previously, Amazon demanded publishers set the price of their eBooks at $9.99. Clearly, such a low price would help Amazon sell more Kindles. Readers could pay hundreds of dollars for a Kindle, but then save money by paying less for novels they purchased.
This was rather revolutionary for the publishing industry, where publishers of books have historically set their own book prices. Bookstores can, of course, sell the book for less, but the retail sticker price was set by the publisher.
After Apple's iPad launch, Amazon agreed publishers can set the price of their own ebooks. This makes sense. If publishers decided it was better to only sell eBooks for the iPad, this would destroy Kindle's value. The move means people reading eBooks can choose their platform and expect the same price for a given book, regardless of the ebook reader they choose.
For readers, lower book prices are generally good. However, readers often fail to understand how much time goes into creating a book. It's not just the cost of paper and printing. A technical book, for example, on electrical wiring might have a limited market and take considerable effort. A $10 price for the book might mean the author and publisher would decide the title just isn't worth producing. Publishers need to be the ones setting the cover price of their books. Of course, competition helps constrain the price of books, which is good. While our hypothetical book might help a do-it-yourselfer save thousands of dollars in wiring a home, that doesn't mean the book should cost hundreds of dollars. Rather, the price is set relative to the competition, other professional-level, wiring books.
From these four articles, we see there are several measures of entrepreneurial value creation. In addition to the financial return to entrepreneurs and investors in a company, we can also look at the satisfaction in building a business and creating quality products, we can examine the value created for the product's end-user, and, we can consider the overall benefit to society of a company.