Effort Does Not Equal Value

I was watching Shark Tank yesterday and it struck me how often people over-value their effort.  Many people seem to think that the harder they work, the more their business is worth.

One woman in particular, had not received any offers from the Sharks – all five were out.  Then she welled up in tears and between sobs tried to explain how hard she’s worked over the past four years to bring her product to this point.

Watching this, I wanted to jump through my television screen and explain to this woman that how hard she worked was irrelevant.  Here’s why I believe this:

After an entrepreneur’s product pitch, the Sharks’ first questions are almost always, “What are your sales and over what time period?”  After hearing these two answers you see one of two reactions; the sharks either slide back in their chair and roll their eyes or they sit up on the edge of their seat and smell blood in the water. 

The Sharks are able to determine whether an investment opportunity exists by looking at the company’s sales, how much gross profit was earned off of those sales, and then combine that information with how much they’d be willing to pay for those earnings.  Maybe three times, five times, or ten times earnings, depending on the situation.

Given that the Sharks’ decision is based on the numbers, effort is irrelevant at this point.  If an entrepreneur could accumulate $2,000,000 of sales, earn $1,000,000 in gross profit, and ask for a valuation of three times earnings ($3,000,000), it matters not whether the business owner works two hours per week or 80 hours per week.

And it’s not just the crying lady that I’m picking on.  There have been many men and women who have come to the Shark Tank and due to overvaluing their past efforts or prospects for future sales, ask for ridiculously high valuations only walk out of the Tank with nothing but criticism from Mr. Wonderful.

I don’t think this sentiment is unique to Shark Tank.  I believe this mindset has an impact on what we demand from our employers and our government as well. 

I think this mindset causes resentment between co-workers and neighbors, who ask, “I work just as hard as them, so why do they make more money than I do?”  And pretty soon we start worrying about being underpaid for our effort, when we should be thinking of ways to become more valuable to our employer.

This 'effort equals value' mindset might also explain why many Americans think taxing wealthy people more than anyone else sounds fair.  If all effort is of equal financial value, then everyone should make a similar wage.  Unfortunately, for people who feel this way, the marketplace – just like the Shark Tank – is not concerned with effort, but value.

When you buy a gallon of milk at the store, what are the factors you consider?  You look at the brand, the type of milk, and the expiration date.  You could not care less whether the cow’s milk parlor operator was sweating to the oldies or cool as a cucumber.

When you stop into Starbucks for your daily Dirty Chai Double Shot with two pumps of Vanilla, do you care whether the barista feels properly compensated for her hours worked?  No, you just hope she’s paying attention and doesn’t pump the hazelnut instead of vanilla, because that would totally ruin your day and you probably wouldn’t even notice until you got all the way to your car.  And then you wouldn’t want to go all the way back in and have her remake it.  So you just try to choke it down, but honestly, it’s awful.  So you just throw most of it away and you get to work and just surf the internet until lunch, because seriously, who can focus on work without their morning tea?

So in summary, we are not worth effort we put in, but rather the value of the output we produce.  This is true if you’re an employee looking for a raise, a salesman looking to develop customer relationships, or a business owner looking to bring in an equity investor.  Working harder does not necessarily create value; maximizing value is the goal, not maximizing effort.