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 also changed dramatically.

I work in private equity. I need to be very aware of what capital is, and always be on my feet because the way capital looks is always changing. Not understanding, and not recognizing capital, can be a very big mistake for any investor.

In an agricultural economy, before industrialization, more hands meant more production. It used to be that having children was a good 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 as they grew up, they could work and produce more than what it cost for them to eat. Modernized farmers don’t have an economic reason to have many children, because they do their work using machines. Where children used to be a form of “capital” for their parents, they are not anymore in most cases.

In more modern times there has been a big change in what “capital” is for the retail business—computers and electronics are a very good example.

As with other retail businesses, computers and electronics stores used to live by the old adage: “location, location, location”. Being a successful computer and electronics store was as much about choosing good products as it was about managing inventory efficiently, making good 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 that was present in almost every city in the United States. Even smaller cities had at least one CompUSA. It was a huge retail space full of computers, computer parts, printers, cellphones and all kinds of accessories for the “digital life”.

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

Buying computers and electronics became easier 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 good sales force: a website that was easy to use and understand took its place.

Shipping products directly to the consumer became faster and cheaper. Soon, waiting 24 to 48 hours became acceptable, especially for a planned purchase such as an expensive computer or a large TV. 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 a good example of how information became better capital than buildings. If you are able to find out what your customers want regardless of their location, and you can deliver their product quickly and cheaply regardless of their location, then information and your capacity to evaluate and transmit it, is the greatest capital you can have.

Uber, Lyft and others are another good example 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, what matters most now in the transportation industry is the information. 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. In many ways, consumers have to compete against each other (like when Uber has surge pricing).

As more and more artificial intelligence is built into mobile services, the information companies will become commoditized, which means that they will not be able to 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 from Walmart.com. There is also little difference between a ride you get with Uber, or one from Lyft and any of their 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, in a type of reverse-auction, where you will always get the best possible price available in the moment, with the best quality, and no intermediaries.

Of course, there will be barriers, and some struggle. 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.