Strengthening Power Law by Applying Ecosystem Approach

In my previous post, I explored the Ecosystem Approach to Venture Investing and highlighted its benefits. In contrast, the traditional venture capital (VC) playbook often relies on the power law approach, where success hinges on one or two breakout investments delivering outsized returns. Some funds excel in this strategy – with most failing but a few yielding significant returns.

While this apparently spray thin method, some give this a moniker “spray and pray’, is not as random as playing roulette in a casino given the rigorous due diligence involved, it has its limitations. How can we increase the likelihood of success, or put differently, reduce the risk of failure? What if we could combine the strengths of the power law approach with the ecosystem approach to address the inherent drawbacks of relying solely on power law dynamics? This hybrid strategy could unlock new opportunities while fostering a more balanced and sustainable venture ecosystem. #ecosystemapproach

Here are top three drawbacks of the power law approach and how they can be addressed using the ecosystem approach:

1. Selective Focus: It concentrates on a few startups, often neglecting the rest of the portfolio.
   • Ecosystem approach remedy:
     • While focusing your time on high-return unicorns, collaborate with other entrepreneur support organizations to provide a safety net for less successful startups.
   • Benefits:
     • Investors may not achieve strong returns on a particular portfolio, but the losses are still minimized. 
     • The societal impact of a failed business is effectively managed.
2. Limited Impact: It often falls short of creating long-term value for communities, industries, or stakeholders beyond the individual startups that succeed.
   • Ecosystem approach remedy: 
     • Collaborate with other entrepreneur support activities such as knowledge sharing, policy advocacy, and building shared resources.
   • Benefits:
     • Creates shared value and enduring infrastructure that benefits more than just a select few companies.
     • Organically builds and grows the potential customer base.
3. Winner-Takes-All Mentality: Hyper-competition may create fragmentation, discouraging collaboration amongst portfolio companies.
   • Ecosystem approach remedy: 
     • Facilitate partnerships both within and outside the local ecosystem, while supporting long-tail startups that contribute to the sustainability of other startups. 
   • Benefits:
     • Creates an environment where success is not concentrated in a handful.
     • Lower social impact of failed businesses while strengthening other entrepreneurial support businesses.

By blending ideas and strengths from diverse methodologies, we create a distinctive approach to venture investing. This model accelerates scaling, broadens exit options, nurtures community, and reduces investment risk.

We at Momo VC are very excited about the potential of this.

Stay tuned for more updates!

In the meantime, if you’d like to connect with us, please reach out at info@momo-vc.com.