We are in the second round of eToro startup course,  below are some insights following Startup Class 3 on Value Systems.

As usual the week’s class was attended by an eclectic group of the highly talented people that we have here at eToro along with one or two visitors checking out the scene. Just before tha class I was out of line with one of the students, which lead me to say I am sorry in a very special way, we started the class twitting   “its ok to tell your manager to go fuck himself, if he is out of line or annoying you”, reaffirming the openesss (perhaps insanity) of eToro’s culture. Haven’t had anyone take me up on this generous offer so I a guess I’m fine. I am not sure this is the kind of culture that would be encouraged in the competitive environment of an investment bank or a global law firm, which I suppose brings me onto value systems…

The class was about how the valuation of companies have changed over time; value was previously determined by what the company said it was, compared with the present today where a company is valued based on its long-term potential.

The great companies of today create value, are lasting and durable and capture at least some of the value they create.

Previously valuations were based upon formulas such as PER ratio (price earnings ratio) or PEG ratio (price per share, earnings per share, annual EPS growth). However the class learnt that to accurately value a company one must take into account growth, the time value of money and variable cash flows. New means of valuing companies are constantly evolving. Today many tech companies lose money and their value is restricted to the future, ignoring the traditional 10-15 year thinking…

A company’s valuation only makes concrete sense if it has long-term durability. The ‘first-mover’ advantage as outlined in the class is therefore crucial. However if one wants to maintain value being the last-mover is as important as being the first mover. Sustainable innovation is the key to long-term value.

Supply and demand are useful in capturing value. Within this context the class discussed the positives of operating within a ‘blue ocean’ compared to the ruthless competition of a ‘red ocean’. The most desirable aim would be to become a monopoly rather than operate within a ‘perfect economy’, where a large number of firms enter the market and swallow up profits. However in order to monopolise one must innovate and continue to create value that can be sustained over time. Google operates by the mantra 10x where they constantly aim to create products and services 10 per cent better than that of the competition.

Effectively competition is overrated. The idea of graduating from Stanford Law school and then going on to work insanely hard for a good pay package amongst ruthless competition where the odds are stacked against you is hardly rewarding. Startup life can be tough and full of risks, but also less pointlessly competitive. You know where the end game lies. Winning by a large margin is better than ruthless competition if you can swing it in that direction.

Technology starts from the idea that the world is Mount Everest. If the world is truly flat its just crazed competition. Well-defined, well-understood markets are harder to master.

There is a dynamic that arguably characterises all great tech companies i.e. last mover monopolies. These businesses create value. They last. And they make money. Successful businesses are trained to focus on sustaining innovations, innovations at the profitable, high end of the market, making things incrementally bigger, more powerful and more efficient.

To create value one needs to be bold and brave and perhaps do the unconventional, like telling your manager to go fuck himself.