Value Creation: What are the key drivers for value creation? Utpal Sheth explains
Someone who has just tuned in would say, “That’s the value.” Let’s discuss each component one by one. Value creation, to put it very simply, is when a company or business creates value, and value is a function of demand, customer satisfaction, and shareholder satisfaction. What is the fundamental key driver of value creation?
Utpal Sheth: So I want to be clear that we’re talking about value creation, value destruction, and value migration, all in the context of creative destruction. And we’re talking about creative destruction itself in the context of terminal value investing and gorilla companies becoming gorilla companies because of megatrends, leadership, and intangible assets.
Most investors believe they are responsible for creating wealth, and this is true because they invest capital and manage risk. In fact, they participate in the process of creating value.
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But which of these three variables is a priority? For some people, valuation is a priority. For some people, business quality is a priority. For some people, management quality is a priority. I think in a rapidly changing world like ours, where value shifts and value migrations are happening in ever-increasing volumes and at an ever-accelerating pace, you have to have adaptable and agile management teams. These new-age companies we’re talking about have a win-the-world mentality where scaling has no traditional limitations.
Most companies think about growth in a very limited framework. But in modern business models, for example in networks and platforms, marginal costs are constantly falling or very, very low, and so the returns to scale are phenomenal. The marginal creation of adding a customer is enormous compared to the cost of acquiring that customer. So we know that a lot of venture capital funds use the LTV to CAC ratio as a framework for looking at companies.
But here we have the opportunity to use LTV to CAC in the context of really mature, scaled companies that have already taken either a leading or dominant position. So I think the way value is created today is very different and much less constrained compared to the past.
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