The other day I substituted for my friend Professor Paul Magelli at the University of Illinois College of Business. U of I was named one of the top 15 undergraduate business schools in the country. My exposure to students from there confirms that ranking. They are sharp.
Paul teaches a class on entrepreneurship. As the class started, I asked the students why would anyone build a business? Their answers were insightful and sometimes irreverent which was pretty funny. If you ask yourself that question, “Why build a business?”-what’s your answer?
A lot of people tell you it’s about making money and earning a living. Sure. But, you don’t need to build a business to do that. Others will tell you it’s about following passion. I don’t agree with that. I am passionate about fly fishing but it would be awfully hard for me to build a business around it.
Mark Cuban once tweeted that when you build a successful business passion follows you-it doesn’t lead you. You learn to become passionate about the business.
What about building value? In a tweet a long time ago, that’s what Marc Andreessen said. Build value. Solve problems. People will pay you for it.
Every single successful sustainable business in the United States builds value for someone. People pay them and the entrepreneur earns a profit if they operate their business correctly. If you aren’t generating revenue, and eventually generate profit-it’s a hobby.
That’s why this study on Uber is so interesting. How much would be lost if Uber simply went away? A team of economists looked at all the numbers. They found that for every $1 spent, $1.60 in consumer surplus was generated. Wow. That’s huge. Consumer surplus is social value. Uber X generates $18M in social value per day, $6.8B per year.
The question now is this, Is Uber sustainable at these prices and operating margins?
For Uber, driverless vehicles are huge. But, driverless vehicles will change the consumer surplus calculations because the utility an Uber X driver gets from the service also go into them. It’s important to understand the underlying economics of your business to uncover whether it unlocks economic value or not.
For me, one of the best parts of getting an undergrad and graduate degree in business was that I truly was able to study the underlying economic principles of a business-it’s not just gut feel. I find that when businesses base themselves on free market economic principles like Coase they have a chance of becoming big.