Legendary investor Ray Dalio’s new book Principles is a great read and recommend it anyone seeking to understand how to build more process in life. In it, Dalio says that he believes the single most powerful process in the universe is evolution. This follows a major theme in his book — that we learn the most about ourselves through our failures, not our successes. It is the same with evolution, which is shaped more by lessons of failure than status quo success.
When you look at nature you’ll see that our world is actually a patchwork collection of ecosystems, linked together for a surprising mix of versatility and durability. My oldest child is studying biomes in science class which perfectly illustrates this “networking of nature.” This topic is studied extensively in Mark Buchanan’s book Nexus – Small Worlds and the Groundbreaking Science of Networks. Buchanan does a fantastic job illustrating how small network theory is demonstrated throughout our world.
So as humans, who have made it through our own evolutionary gauntlet, we now find ourselves working in today’s private equity ecosystem. As a business development professional, my thriving or failing largely results from the strength of the relationships within my network. Small network theory has some interesting implications for all of us. In fact, it can provide a template for effective networking, strengthen your existing network, and help you identify the most efficient prospects to target.
Let me explain more.
What is a small network?
The easiest way for me to explain the concept of a small network theory is through a game most probably know: Six Degrees of Separation. This was a popular game in the 90’s when bored college students tried to determine how many degrees of separation existed between Kevin Bacon and another celebrity.
As it turns out, very little. On average, Hollywood actors are connected to Kevin Bacon by less than 3 degrees of separation (2.95, to be exact). This is a great demonstration of a small-world network. Scientist believe that these network structures can be found everywhere including the human brain, the internet, and natural ecosystems. The premise of such a network is simple: most nodes are linked not to each other, but to a handful of hub nodes. As a result, not all nodes are linked together; instead, only a tiny fraction of nodes (hubs) have lots of links, thereby shortening the pathways between the entire network.
Interestingly, the nature of such networks can be complex. One study in Nature magazine found that most small networks weren’t either completely random or carefully designed, but rather, lay somewhere in the middle. Such networks yielded interesting advantages, as well. For instance, deleting a random node with few connections did little damage to the whole. Only when a major hub was destroyed did the ecological network fall into disarray.
What does any of this have to do with business development in private equity?
To use small network theory, BD professionals must understand that not all prospects are equal. First, it’s important to note that in the digital age, technology makes it easier to communicate–but harder to connect with others in a meaningful way. As early as 2012, experts understood that in terms of social links, quantity began to surpass quality: essentially, as social networks grew ever more expansive, they also became increasingly shallow.
Granted, this already has ramifications for our personal lives and health–but the negative, unintended consequences don’t stop there. In fact, such consequences are also present in business networks; tools like LinkedIn allow for BD professionals to build up a huge digital Rolodex–of contacts that they barely know. So how can deal professionals build a strong, versatile network, and use it to boost their deal flow?
The solution for this also lies in small network theory. As an article in Harvard Business Review makes very clear, having a large network is no guarantee of success; rather, the value of an effective network lies in having solid indirect contacts. By way of example, if you are working on business development for a chemical company, and you hear that Acme Products is developing a new line of detergents which require a similar class of chemical, who would you speak to in order to bring in orders (or even potentially create a partnership) from Acme? Likely, you would want to speak to the chemists–and you would need to find a way into Acme’s research and development department, ideally through an indirect introduction.
Wittingly or not, HBR lays out an interesting strategy that follows small network theory almost to the letter: target the hubs of the network, rather than a node. If possible, become a hub yourself: reduce the distance between you and other connections, both hubs and nodes.
Take a look at this presentation from the OECD, specifically slide 8, which maps out the hubs and nodes of the Boston biotech community. Imagine if you were doing deals for a biotech company in that space–no easy feat, given the presence of heavyweights like MIT and Boston Robotics, world-beating companies that punch far above their size.
Rather than spending your time building your connections with small nodes or focusing on the large hubs that dominate the top of the page, it may be worthwhile to target the intermediate ones. Notice the smaller, medium-sized hubs which, despite having less connections than a few bigger hubs, feature the shortest path to a large number of nodes. In fact, one could argue that these intermediate hubs may offer the best return on time and effort expended; not nearly as inaccessible as the huge hub companies, but an easier, soft entry that can yield a lot of solid, midsized contacts through which to build the foundation of a network.
In many ways, network theory is still being developed and understood, but its positive effects and lessons are quite clear–especially for BD professionals. By better understanding these concepts you can strengthen your network, create and add nodes, and most of all, target the important hubs that can help you reach your BD goal. Remember, think about how to reduce the distance and degrees of separation between you and the other nodes within the network.