How many different ways are there to create true long-term value?
It’s difficult to even think of how to answer such a question.
Hmm.. let’s see, there are lots of different industries to start, so that makes the problem pretty broad. Also, there are lots of different methods to improving a business: you can optimize a current business model, you can disrupt a value chain with a new business model, you can just work harder, you can work smarter, etc. etc.
I was thinking about this question over the weekend when an episode of Shark Tank came on the TV.
“Perfect!” I thought. Here’s a great case study. The entire premise of Shark Tank is that the “sharks” are gifted business people who create long term value.
However, is that true?
Let’s take a look at Mark Cuban (he just happened to be the one I picked on). He’s written books, he owns a basketball team, and is overall portrayed as a gifted businessman. Surely he’s someone who has mastered the art of creating long term value, right?
But how did Mark make his money? Let’s take a closer look.
From Mark Cuban’s wikipedia page:
“In 1995, Chris Jaeb and fellow Indiana University alumnus Todd Wagner started Audionet (which Cuban started to fund in 1998), combining their mutual interest in Indiana Hoosier college basketball and webcasting. With a single server and an ISDN line, Audionet became Broadcast.com in 1998. By 1999, Broadcast.com had grown to 330 employees and $13.5 million in revenue for the second quarter. In 1999, Broadcast.com helped launch the first live-streamed Victoria’s Secret Fashion Show. That year, during the dot com boom, Broadcast.com was acquired by Yahoo! for $5.7 billion in Yahoo! stock. After the sale of Broadcast.com, Cuban diversified his wealth to avoid exposure to a market crash.”
Also from Wikipedia:
“On April 1, 1999, less than 9 months after the IPO, Yahoo!, announced the acquisition of broadcast.com for $5.7 billion in stock. At the time, broadcast.com, had 570,000 users, and the purchase price was $10,000 per user. Cuban sold most of his Yahoo stock that same year, netting over $1 billion. Founder Chris Jaeb, whose stake was diluted to less than 1% of the company, received approximately $50 million from the sale. The service became a part of Yahoo! Broadcast Services. Yahoo shut down much of its broadcast services in 2002 and broadcast.com has since been discontinued.”
Ok – they sold a company to Yahoo! for a ridiculous valuation at the height of the dot.com bubble and Cuban diversified before the market crashed.
After Yahoo! bought the company – the service was shut down.
In reality, broadcast.com was just one in a long string of failed acquisitions by Yahoo! yielding no long-term value at all. If you look at the sale of broadcast.com skeptically, the transaction was really an exploitation of institutional investors that trusted Yahoo! management not to make a dumb decision (which they did). The end “net” wealth transfer probably ended up shifting a lot of money from hard working folks (who had invested in Yahoo! via 401(k)s and pension funds) directly into Mark Cuban’s bank account.
Now, it’s important to caveat – after making all of his money – I’m sure Cuban has done things with his capital to create tremendous value, but I’m not really interested in that. Our systems have been built for a very long time to advantage those with money and help them make more of it. By far the hardest part of being successful is going from nothing to something – and in that department it appears that Mark was more lucky than good.
Now, let’s look at a different case – Warren Buffet. Buffet makes really long-term bets and does (what looks like) a lot of really unsexy things – like buying companies that are under-valued because they aren’t seen as innovative or new and squeezing value out of them. He has methodological, formulaic approach to valuing assets, optimizing their performance and he keeps at it for a really really long time.
So, what can we learn from these two cases? Well, more data collection is probably in order before making any concrete conclusions, but I have a theory: when it comes down to it, there are only a few ways to create true long-term value and they all involve doing pretty disciplined, unsexy things for a really long time. Carefully tracking revenue and costs, identifying and managing to key performance indicators, optimizing supply chains, focusing on scale and low costs, holding every investment to a strict standard in terms of ROI and quickly redirecting failing projects, etc.
The folks, like Cuban, who people say “everything they touch turns to gold” I’m immensely skeptical of. Maybe they have touched something, and it turned to gold. But it doesn’t mean it was their touch that did it – or even that the thing they touched deserved to turn to gold.