We start small and work our way outward. At the core there is the value unit, which isn’t the bit but what its batches stand for. We may call this information, but it includes a great deal besides. In the sense of media there is content. In finance and commerce there is data. There is knowledge more broadly, related to knowledge work, in science, education, law, and so on; in all services. Increasingly information (via bits) is integrated with production of goods. The list goes on, and its categories tend to overlap. So for simplicity we may generally call the items information, and regard this core as the value unit.
This is a depleting asset when left alone, because it has life only as information is relevant. Data, news, behavior changes, are information that might only be momentary. Some information has much longer shelf-life, especially if we include arts and entertainment. But even then it’s a matter of degree, perhaps even in the sciences. Supply and demand factor in and complicate calculations, but when dealing with information we’re dealing with perpetual supply, almost by definition, and some knowledge is more quickly set aside than another. For purposes of this discussion though, we should limit ourselves to information that’s shared in bits (in the age of mechanical reproduction). A depleting asset.
This value unit, however, is processed through systems. These serve to renew, replenish, refresh, the life and thus the value of information, more or less effectively as different information lends itself to such processing more or less readily. Information systems, in the technical sense of bits and bit flows, have largely tended to be deflationary in nature. Moore’s Law, open-source, web distribution, shared storage, and other such efficiency features of digital technology contribute to a lowering of barriers and business costs, and to a set of consumer expectations predicated on “free” or, at the very least, lower prices over time.
In this environment of a depleting value unit processed through deflationary systems, platforms exist to create enterprise value. They do so in a variety of ways that includes technology upkeep and improvement, feature integration, economies of scale, security, network effect, brand presence, and related staples of the digital media and information technology segments – which are increasingly converging with counterparts in finance, commerce, education, healthcare, hardware, and others. The link, once again, is information and its qualities and flows. It is the common language, in a sense, and enterprise value created through it very much depends on its fluency and economics.
Enterprise value consists of two basic ingredients: a core business asset and its optionality. The former is the foundation, the actuality, and the latter is its future possibilities, many of which unknown. The value of a platform is determined not only by the success with which it currently operates, but by its ability to do so with equal or greater success ahead. For an enterprise to grow into and justify its option value, in the context of the information environment described, it must continuously fine-tune its platform and reload its systems. In the financial sense, this equates to long-term life (perpetuity), and an ongoing stream of willing buyers for its product (even as it may be reinvented), and for itself.
The balance between the core asset and the optionality varies with different types of platforms and different stages in the enterprise cycle. At one extreme, the pure startup, the value proposition is likely all option based. At the other extreme, say, the mature utility, the option value will be very low. In between these two ends is where most financial activity takes place, and structures are determined by the blend of optionality on the upside and asset coverage on the downside. In an information-based environment – characterized by economic drivers and market profiles as touched upon in this overview – financing structure and business valuation take on special features that reflect it.
… Or at least, they should. And the nuances of venture capital, later-stage lower-risk equity, debt funding in its many manifestations, the differences between liquid and illiquid positions, strategic versus purely financial investment, and the timing of investment exits, all should be understood in the depicted context of bits, value units, systems, and platforms… even as financial asset classes themselves converge and take on characteristics of the underlying sectors they target and support. We start small, and work our way outward.