Investing in networks, not companies

When deciding where to invest their money, many people research a few companies, determine which one has the best product and profit margins, then dump their funds in that company; but that is a narrow, unsophisticated strategy. Great companies have great products, marketing, profit margins, and leadership; but the best companies are part of a wide network of great companies. Investing in networks over companies reduces risk and increases gains.

Some companies start out isolated and later in their development join larger networks; but companies who stay isolated their entire lifespan often die early deaths, or do not grow to their full potential. When investing, don’t analyze a company as an atomistic entity, look closely at how it relates to and interacts with other companies across the whole market. Look at the other firms with which it has partnerships and contracts. Check the names on the board of directors and see what other investments and professional duties they have and how that ties in to the company under analysis. For example, if a former top executive from Apple is on the board of a new tech company, then you know that startup has mentorship, direction, and access that its competitors may lack.

In your research, you may discover that a company has everything it needs to succeed, yet other companies networked to it will see even more success. Even if that company has an incredible product, they might not be the organization in their supply/value-chain that profits the most from the product’s success. Consider a killer-app for a gaming console: you may expect the software developer to sell millions of copies at a profit of $10 per unit, but if those millions of consumers have to buy the new console to run the software, and the hardware company earns a profit of $100 per unit, then the hardware company is the better investment choice for the short-term. Companies such as Aragon, which make products and services that enable thousands of other companies to succeed, will benefit massively from the growth and success of  blockchain-based Web 3.0.

If a well-networked company stumbles, then it can receive support,  guidance, or bailouts from its partners. An isolated company will have to fend for itself in shark-infested waters. A company that has strong, dependable friends that succeed when it succeeds carries less risk than others. However, since their fates and fortunes are so closely linked, there lies the possibility that one major scandal or failure could bring the whole network down simultaneously. Therefore, when investing in a network, it is critical to also identify firms that will benefit if your favored network collapses; make small investments in these firms as a hedge to further mitigate risk to your portfolio.

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