The Ever-Changing Shape of Capital

In the history of humanity, what is considered “capital” has changed many times. More importantly, the relative value of this “capital” has…

In the history of humanity, what is considered “capital” has changed many times. More importantly, the relative value of this “capital” has also changed dramatically.

I work in private equity. I need to be very aware of capital and always be on my feet because capital looks are constantly changing. Not understanding and not recognizing worth can be a huge mistake for any investor.

photo by Karolina Grabowska

In an agricultural economy, before industrialization, more hands meant more production. It used to be that having children was an excellent way to “capitalize” your farm — especially if you had boys. There was so much work to do by hand that farmers would have many children, hoping that they could work and produce more than what it cost for them to eat as they grew up. Modernized farmers don’t have an economic reason to have many children because they work using machines. Children used to be a form of “capital” for their parents; they are not anymore in most cases.

There has been a significant change in what “capital” is for the retail business — computers and electronics are excellent examples in modern times.

As with other retail businesses, computers and electronics stores lived by the adage: “location, location, location.” Being a successful computer and electronics store was as much about choosing good products as managing inventory efficiently, making sound real estate deals, and training and managing an effective sales force and customer service. It could be said that, back in the 90s, employees, real estate, and inventory were most of the capital of computer and electronics stores.

If you are old enough to remember, CompUSA was a chain of computer megastores present in almost every city in the United States. Even smaller towns had at least one CompUSA. It was a vast retail space full of computers, computer parts, printers, cellphones, and all kinds of accessories for the “digital life.”

Unfortunately for CompUSA, the Internet was highly successful at taking most of their customers.

Buying computers and electronics became more accessible and easier over time. Consumers became more expert about what electronics they wanted, and they could read and watch detailed reviews online. This destroyed the capital in having a reasonable sales force: an easy-to-use and understand website took its place.

Shipping products directly to the consumer became faster and cheaper. Soon, waiting for 24 to 48 hours became acceptable, especially for a planned purchase such as an expensive computer or a large T.V. There was less and less need for stores with local but limited inventory. Amazon and other online stores provided every model of every brand fast enough. The capital in having local real estate went away.

Finally, as more and more online stores had more and more variety available, it became impossible to compete through logistics. If a local retailer had a product available, it was probably cheaper online, and you could get it fast enough. You could also choose between almost infinite options. It was impossible to compete on variety. Managing local inventory efficiently became irrelevant in the age of giant distribution centers connected to a network of fast and inexpensive shippers.

CompUSA does not exist anymore.

The story of computers and electronics retail stores is an excellent example of how information became better than buildings. If you can find out what your customers want regardless of their location, and you can deliver their product quickly and cheaply irrespective of their location, then information and your capacity to evaluate and transmit it is the most significant capital you can have.

Uber, Lyft, and others are other good examples of how physical (taxicabs) and even intangible capital (taxi medallions) have ceased to be as valuable in the business of providing transportation. Thanks to mobile apps, databases, and cellphone networks, information matters most now in the transportation industry. The tools to take in as much information as possible, and help all the participants in the business (drivers, passengers) use it effectively, are the most valuable capital.

Many of today’s most successful businesses have the majority of their capital held up in these types of tools. Software developers are the construction workers of this time: they build the capital “bricks” of software.

But things are about to change again, and very quickly! Right now, each of these information companies (Amazon, Uber, Lyft, etc.) control their information and keep it to themselves. They make money from this control in a way that works against the consumer. Consumers have to compete against each other (like when Uber has surge pricing) in many ways.

As more and more artificial intelligence is built into mobile services, the information companies will become commoditized, meaning they will not differentiate themselves from each other. This is already happening, and eventually, they will become irrelevant. There is little difference between a laptop you buy from Amazon or Walmart.com. There is also little difference between a ride you get with Uber or Lyft and any competitors.

Someday soon, your A.I. personal assistant will be able to communicate with the A.I. platforms of car services, retailers, food delivery services, etc., at superhuman speeds and with unbelievable detail. In the end, providers will be competing for you, which is a type of reverse-auction, where you will always get the best possible price available at the moment, with the best quality and no intermediaries.

Of course, there will be barriers and some struggles. After all, the candle and oil lamp makers didn’t want to give up their business so easily when electricity came along. But in the end, the next big thing will most likely win.

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