It is my belief that many entrepreneurs often focus a lot on creating value and often not enough on capturing value. Products are inherently created on the premise of creating value and they become great and viable companies by capturing that value.

Many entrepreneurs find a problem and go solve it. That's fair. Having a bias for action is one of the core skills for success in an entrepreneurial journey. However, it behooves one to think about where your product or service fits into the dynamics of the “value chain”.

The customer journey is not just about buying or purchase decisions but also other players and stakeholders in the customer's mind. Further, understanding dynamics of the industry you are operating in, is also critical.

ACTION: Do make a customer journey and industry map of where you fit and how you expect that picture to evolve in the next 3-5 years.

Are you creating enough value?

This can be simply answered by evaluating if you are solving a real customer problem. Here’s a handy checklist for evaluating if one is creating value:

1. Who is the customer (consumer / business) and the buyer that you are creating this value for?
2. Is this a latent desire for this customer or an explicit need that they have identified and are perhaps solving with an alternative solution?
3. If its an existing, expressed need, is your innovation way better than the current state of the art? What are the the set of offerings (including “manual” solutions) that they are using to solve the problem?
4. At some point now or in the future will you be able to charge something for creating this value?

If you have answers to all of the above questions, then you are creating value. Of course, you need to have some minimum viable corpus of resources - people, money and other assets to create that value. So, it becomes really important to also figure out what it will cost to create this value.

If and when would the customer be willing to pay for the value "created" ?

To start out, customers may be paying not just with money but with their time, energy, commitment, etc. (think Advertisers on Google vs. Users of Google Search).Money may happen later in the cycle so long as the value created is “for real”. Often a good proxy for this -- esp. for an existing pain point -- is what they are willing to spend on another, possibly “inferior” solution.

Secondly, is there a gap between the purchase decision and/or the solution? Often the value may be created at a completely different point than where the value is captured.

Finally, is the user of the product or service different than the buyer? These two questions will become very important when we look at capturing value.

The checklist for evaluating "Value Capture" is as follows:

1. Get proof that the customer is willing to pay for that value created. The sooner the better.
2. Understand the landscape and the customer journey to the buying decision.
3. Discover the “price” that the customer is willing to pay for the "value"; one good rule of thumb is your pricing should be lesser than the value created and yet make it a viable business.
4. Evaluate competitive landscape and how your product or service fits in that.

For example, companies that offer research and discovery service - e.g. searching for and finding new products, comparing their features, etc. However, you may find that eventually the customer “goes” off your product or service to consummate the purchase on a different platform.

In this case a lot of the value may be captured either at the origination - say Google in this case or say the end site where the product or service is bought, say Amazon. Even though you enabled the search and discovery process you may not be able to capture much of the value.

Often you may be creating a lot of value but you are too far away from the “point” where the value will be captured. Inherently, there needs to be balance between value creation and value capture. Often, this will also depend on the stage of the company but needs to move in sync with each other. In this graph here, you want to ensure that the value is captured at every step of the cycle between A and B.

Create, Capture, Create, Capture, … Rinse and Repeat.

To summarise, here are a few rules of thumb for early stage startups:

1. Always create more value than you capture. The general rule of thumb for fantastic B2B businesses is to create much more value than you capture. This helps with fast sales cycles and also with customer retention.

Your margin is my opportunity
- Jeff Bezos

2. Ensure your offering is close to the “point” of value capture or at least minimise the time between value creation and value capture.

3. You may have to go through cycles of value creation and value capture but in the long term they need to be in “sync” in a particular time frame (e.g. for each round of funding or 12 months duration).

To conclude, several early stage startups either focus too much on “value creation” or are too obsessed with “value capture” for extended periods of time. A good example of a company that has created a lot of value but not captured enough is Craigslist. On the flip side, companies that captured too much value without creating (ongoing) value were the Enterprise Software companies of yore. SaaS companies disrupted those both by a better business model and delivering ongoing, incremental value. Ideally, you want to be in sync on the value create-value capture cycle.

What are good examples of companies that you have seen that have been "out of balance" on either the value creation or the value capture side? Do you have a framework that you would use to evaluate if you are at the "sweet" spot? Please do share your thoughts and comments.

About the Author -

(Amit Somani is a Managing Partner at Prime Venture Partners, an early stage Venture Capital firm based out of Bangalore, India. Prime VP invests in category creating, early stage companies founded by rock star teams. Prior, Amit has held leadership positions at Makemytrip, Google and IBM. He is also deeply engaged with the early stage startup ecosystem in India and actively volunteers with iSpirt, TiE and NASSCOM. He tweets at @amitsomani)

This article was originally published on Linkedin