new growth theory - Member Blogs - icknowledgecenter32024-03-28T10:13:21Zhttps://smarter-companies.com/profiles/blogs/feed/tag/new+growth+theoryFacebook, WhatsApp and Intangible Capitalhttps://smarter-companies.com/profiles/blogs/facebook-whatsapp-and-intangible-capital2014-02-26T19:43:08.000Z2014-02-26T19:43:08.000ZMary Adamshttps://smarter-companies.com/members/MaryAdams<div><p><a target="_blank" href="http://www.mindtheproduct.com/2014/02/whatsapp-power-product-focus/"><img class="align-left" src="http://cdn02.mindtheproduct.com/wp-content/uploads/2014/02/whatsapp.jpg?width=200" width="200" alt="whatsapp.jpg?width=200" /></a>It can be hard to understand corporate acquisitions, especially when they are as dramatic as this one. <a href="http://dealbook.nytimes.com/2014/02/20/for-facebook-its-users-first-and-profits-later/?_php=true&_type=blogs&nl=todaysheadlines&emc=edit_th_20140221&_r=0" target="_blank">Facebook bought WhatsApp</a> for $19 billion. Like most deals of this kind, it’s hard to judge whether the price makes sense. So I won’t try to address it specifically. But I do think that it's a great moment to talk about what drives value in companies today.</p>
<p>There’s clearly value in WhatsApp. Google made an earlier offer of $10 billion. Many speculate that Facebook had to buy the company to ensure that Google didn't get it.</p>
<p>Both companies were after the 450 million WhatsApp users. The success of all three of these companies is heavily dependent on their users. This kind of <strong>relationship capital</strong> is one of the big four categories of intangible capital, the other three being human, structural and strategic.</p>
<p>WhatsApp actually already has <strong>strategic capital</strong> in the form of a business model where they get paid (only a dollar and only after one year but that’s more than Facebook makes from their users). I actually like this because it puts the company in less of a dilemma than many other web companies who have to find a way to extract as much value as possible from their users without driving them away. (Another alternative would be to <a href="http://www.smarter-companies.com/profiles/blogs/dancing-around-twitter-s-intangible-capital-1" target="_blank">offer equity to users</a>. This still sounds crazy today but I'm convinced that more inclusive financial models will come in companies with models heavily dependent on free users).</p>
<p><strong>Human capital</strong> is critical to any company like this even though at 55 employees, WhatsApp is a great illustration of the leverage that can be gained from <strong>structural capital</strong>, the underlying software and data in their platform. Until recently the best discussion to my mind of this leverage was Paul Romer’s discussions of <a href="http://online.wsj.com/news/articles/SB853799061723758500?mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB853799061723758500.html" target="_blank">New Growth Theory</a>. But right now I’m reading <a href="http://www.amazon.com/The-Second-Machine-Age-Technologies/dp/1480577472" target="_blank">The Second Machine Age</a> and I’m loving the authors' explanation of how the right algorithm can be replicated over and over again.</p>
<p>Getting the right algorithm is the holy grail of our time. It’s the starting point for everyone, including the tech giants. But <strong>none of them can succeed without all four forms of capital</strong>:</p>
<ul>
<li>people to develop the ideas and keep them growing (human)</li>
<li>technology/processes/software to make the idea repeatable (structural)</li>
<li>users and customers to co-create (relationship)</li>
<li>and the right business model to ensure the sustainability and profitability of the system (strategic)</li>
</ul>
<p>Why do we call this capital? Because <strong>they are all economic assets</strong>. I can assure you that WhatsApp spent significant sums on all of them. But the accumulated investment isn’t recorded in traditional accounting. <br /> But most people know the assets are there. And most people deal with all these elements intuitively. And if you are a runaway success like WhatsApp, you might not need a more structured approach like we advocate with ICounting—identifying and measuring the key intangibles driving the success of an organization.</p>
<p>Of course, most companies don’t achieve these kinds of dramatic results. And they could use a little extra help to figure out their model and explain it to potential partners and funders.</p>
<p><br />What do you think? Does the IC perspective help shed light on these value drivers? Would IC information help the markets make better decisions (not just for mega-deals like WhatsApp but also mainstream companies)?</p></div>