The Repeated Game Nature of Venture Capital

gametheory I was talking to a friend who decided to become an entrepreneur and he told me he has been working on this great idea for quite some time now, investing heavily out of his pocket. When I asked him where he was getting inputs to come up with a solution that the market would adopt he paused and almost secretively told me he hasn’t told anyone about his idea because he was too afraid they would steal it from him. After that, I paused…

Venture Capital is probably one of those industries in which reputation is built over long periods of time, and destroyed with just one wrong move. Individuals and firms in the VC community work hard to build long term relationships as they understand the non-zero sum nature of the game. Success, both for VCs and entrepreneurs, comes after relatively long periods of nourishing key constituents.

If you think about the Prisoner’s Dilemma, the only way to get to the optimum solution is by collaborating, and the only way for individuals to collaborate is by playing the game multiple times.

The repeated game nature of Venture Capital is the main reason why most VCs don’t sign NDAs. If you are an entrepreneur you should be aware that VCs have a lot more to lose if they ever break the “rules of engagement”. Today, with social media tools the word-of-mouth is even more powerful to enforce these social rules.

Moreover, not discussing a business ideas with potential customers is another key mistake, as you might end up climbing a mountain, making a huge effort, only to realize that you’ve climbed the wrong mountain. I’ve recently heard Promod Haque, Managing Partner at NVP and one of the top dealmakers on the annual Forbes Midas List for the past eight years, say that innovation happens in collaboration and close proximity to early adopters. After thinking about this concept I realized it makes a lot of sense, as interactions with those early adopters and multiple iterations are key to crafting the solution the market is willing to consume.

Ideas keep on being a dime a dozen, so my recommendation for entrepreneurs is not to keep those ideas for themselves and share them with people they trust in order to forge a better business solution. Make sure your innovations are not just great technologies but also significant bridges for gaps either in the consumer or enterprise markets.