Letter to Ansh — 9

Dear Ansh

It is late at night Monday 18th February. You are enjoying your time in Rasayani along with your doting grandparents. I missed you and your mother a lot today.

I will continue from where we left off yesterday, there are 3 main ways of commoditizing the process of value creation. When you work for an employer you exchange your time in return for money. But there is only so much you can do physically on an individual basis with a limited amount of time.

What you need to do is make is make the same amount of time work more. The simplest way to do that is to get more work done and instead of doing it all by yourself, get 10 others to do it. The trick is to ensure that you pay them less than what you get for making their time available for the work. You keep the difference.

This is also called as body shopping and is the most common types of money and effort arbitrage. There is nothing wrong with it, you are making an opportunity that is well paying available to labour who did not have that opportunity before. You are charging them for making the work available. It is perfectly fine to capture the value generated in the process of making that opportunity available.

The trouble with this is it is often a race to the bottom and a fight against attrition. Your employees once they realize you are making will demand more of the share and steadily reduce what is left for you. The smartest ones will find ways to bypass you and connect with the opportunity directly. These 2 pincers effectively mean that running such a business is something that only works if you have a steady supply of cheap replaceable labour coming in to replace the more expensive ones.

I have run such a business and can attest that it quickly becomes not worth the time and hassle.

What you need instead is automation. These 10 resources are likely doing something that is simple and repetitive. Identify and codify that pattern and develop systems that can automate this. Replace the men with machines and codes. That way you dont have to pay for labour and keep most of the value. It may mean unemployment for the labour but this is the law of nature, if you do not upskill yourself you will be always supplanted.

When I was working for the Northern Trust, we had a regular manual check in to see if there were any failing trades. Every 5 hours one person spent 30 minutes going through the systems to check if everything was fine. I was assigned this task as well. Eventually I wrote a process that automated it and saved several man hours in the process. At that point in time I did not realize the value of it, but I had effectively made hundreds of thousands of dollars if not millions for my company with that small piece of code through the time and effort savings that were achieved.

Uber intends to do the same with its cars, yes as of 2019 we have humand drivers. By the time you grow up this letter might be dated. But right now we have real people driving each other around. It is a complete waste of time and energy. Automation is set to replace them and drive down costs for everyone.

The one who is able to identify these repeating patterns and package them in a commoditized wrapper are able to capture the value generated through the savings. This is called product development. It is also the key to entrepreneurship. You are to identify an inefficiency, a gap in the market, an unfulfilled need or want and provide the solution for that. The more automated your solution, the more value you will capture as part of the process.

But building a business around such products is very hard. People are smart and often there is always someone else as well thinking about how to solve the exact same problem as you are on. The gaps and inefficiencies are not always obvious and your solution has to be not just marginally better but atleast 10X better than the existing product. Else there is no incentive for people to use your product, people are lazy and victims of habit. You need a compelling narrative for them to sit up and take notice.

So if you choose to jump on the entrepreneurship bandwagon ask yourself carefully, what is the problem I am solving, who is going to pay me for it, are there enough people and is this a big enough problem to actually make money and finally is my solution really 10X better than status quo.

Finding these gaps in value is the first step in making a successful business, and simply put it is the hardest thing there is. Most people are not cut out for it and they are better off working for someone (as an employee) who has figured out the gap.

But making money does not have to be hard, it does not have to be a choice between taking heavy risks by starting your own business or working a menial job all your life and making only a penny. There is another way in which you can make money by investing.

Entrepreneurs do not need just a good value proposition (answers to the questions asked above) but also capital to actually bring their venture to life. You can provide them access to that capital and go along for the ride.

Its well past 12 midnight here and I have to wake up early, let discuss this in greater detail in the next letter.

Your loving father

Moresh