By Maxwell Wessel, Aaron Levie & Robert Siegel
When the great companies of the industrial era were founded, economists believed in the law of diminishing marginal returns:
The more of something that is made, the less valuable each incremental unit of that something becomes. That all changed in the internet era. In the early 1980s economist W. Brian Arthur speculated that in an increasingly tech-enabled world, the more of something you make, the more valuable it can become. Facebook, for example, is worth more to you as more people join the network.
When your product can become more valuable to your customers over time, your priorities need to change. Short-term profit becomes less important.
Consider Amazon Web Services. For years, AWS has introduced low-cost features to lure developers and companies to adopt its platform.
This approach has led to high levels of AWS-specific investment from innovators, like CloudHealth Technologies, Mapbox and Qubole. That ecosystem investment reinforces the AWS value proposition and drives more developer adoption.
Along the way, Amazon.com could have “harvested” value from its existing customers, but the better strategy was to wait while the platform community grew.
This concept is hard for leaders of industrial-era businesses to grasp. How can you defer short-term profitability to build your network? When does your business make money? But as long as you can generate increasing returns, you may ultimately develop more value by waiting to harvest the profit.
Most companies’ investor bases demand profit maximization today. They can’t wait for potentially more profit tomorrow. Meanwhile, as long as upstart companies can find investors and managers who are satisfied with profitless growth, they can outsmart the competition by prioritizing the things that may return significantly more value in the future.
Maxwell Wessel is the general manager of SAP.iO. Aaron Levie is a cofounder and the CEO of Box. Robert Siegel is a partner at XSeed Capital.