As long term investors, with no constraint of having a fund life, we view ourselves as business owners and partners, regardless if we own less than one percent of a company or forty percent and sit on the board. As such, our framework for any investment decision is based on four key pillars, with the fourth, valuation, used as an important overlay to our assessment of the quality of the business, now and into the future.
The framework we use to assess the sustainable competitive advantage is based on Hamilton Helmer’s “7 Powers”. For ease, here is a great summary and review of the book of the book that Abi Tyas Tunggal recently published.
In our mind the most powerful of these 7 powers (we add an 8th being People and Culture) in our view is ‘Network Effects’.
In its simplest form a positive network effects occurs when a user of a network experiences increasing utility as the network grows.
While there is a lot of information on network effects across various sources, we find it very powerful to use shared language with all our portfolio management teams. To help facilitate this, Ed Cowan and Hamish Corlett
made a video series covering how we think about network effects — what they are, the different type, how we assess their strength — as well as walking through some case studies to help illustrate our point.
The full video version is optimal viewing in our mind as it builds the foundational stones to enable a deeper conversation at the end of the video
If you are well versed in networks effects, and don’t have 35 minutes, we would suggest diving into part 3 (below) on how we assess the strength of a network, as we have found this mental model very powerful when looking at all our portfolio companies as well as prospective investee companies.
As always if you have any feedback, please get in touch – firstname.lastname@example.org