All businesses at their core, and their entrepreneurs can be categorized in two styles: value or arbitrage. A value business is one that creates something out of ubiquoutus components and sells that to people. The arbitrage business is when the entrepreneur acquires something, usually a commodity, then sells that or a derivative of that to people at a higher price. When you talk about a business, if you thin along these terms, you will be able to determine which one it is. For example, Google is an arbitrage business. It acquires data on the cheap, actually for free by scraping websites around the world, then sells that data, or advertising built on that data. Nobody charges Google for when their bots visit their sites, but that’s another story. Once you have a good arbitrage business then the goal would be to maximize your earnings out of that business. That is what Eric Schmidt had done for Google. He optimized the business and built mechanisms to maximize its earnings. He in my opinion is the best arbitrage engineer in the world. Now, the founders of Google don’t like being in the arbitrage business. They want to be in the value business. That is why they try to build products like Gmail, Google places, the android, etc, etc. But the reality is that 99.99% of Google’s revenues come from its ad business. The problem with the arbitrage businesses is that once you’re in, it is very hard to get out.
Now think about Apple, Facebook or Instagram. They are all in the value business. Their founders are value entrepreneurs. They don’t buy and sell data, although Facebook comes close at times, which clearly Mark Zuckerberg does not like, and clearly some people in Facebook do like. Wall street likes arbitrage businesses better because it’s easier to calculate and make estimates about its earnings. This is where Facebook and Wall Street will run into disagreements because Facebook still has not figured out how to extract the value out of what it has. Yes it sells ads, but that’s just basic stuff.
Apple worked extremely hard to continue being a value business and it succeeded, at the end becoming the most valuable company in the world. Steve Jobs spent his life making sure they provided value not arbitrage. Dell is in the arbitrage business, it doesn’t make and sell anything novel, it resells stuff. How about HP, Oracle, eBay, or your next startup? So ask yourself what kind of business do you want to start? When you think about any business try to understand whether they are value or arbitrage businesses. Arbitrage businesses do not last very long and either get dissolved on their own or by the forceful hand of governments. Value businesses are harder to start because it requires amazing knowledge base and imagination. It requires a lot of thinking. And as humans, we don’t like to think very hard by nature. Instinctively, we are drawn to arbitrage.
I’m not saying there’s anything wrong with either. I’m just making a distinction. Either type of business could make you very wealthy just look at the founders of Google. But it is only with the value business you will feel that you contributed something to the world and made people’s lives better, and with an arbitrage business you will always question whether or not this is a real business. The decision is yours and it will determine the rest of your career as an entrepreneur.