How we use 'The 7 Powers' to assess early stage ventures at Paloma

If you’ve ever done an MBA you’ve probably come across ‘the 7 Powers: The Foundations of Business Strategy’ by Hamilton W. Helmer.

Whilst pretttttty dense, it does cover some good ground and is a comprehensive overview of how to ensure your venture is successful over the long term.

In short, the book argues that a business must possess at least one of these powers if they are to survive:

1. Scale economics (have lower costs due to more customers)
2. Network economies (have the monopoly of users eg. it’s hard to compete against LinkedIn because they already have everyone on their platform and the whole point of a product like this is to be where everyone else is)
3. Counter-Positioning (create a new model/product that incumbents do not mimic due to perceived damage to their cash cow. The new venture is so disruptive it feels impossible for the incumbent to follow suit)
4. Switching Costs (Customers benefit from repeat purchases/complimentary products so are unlikely to move providers due to the hassle of offboarding and onboarding somewhere new)
5. Branding (customers will pay more than the objective value due to perceived brand value. The obvious example is designer goods- a Chanel bag will go for much more than something from Kmart. The margin there is all in the brand value)
6. Cornered Resource (access to something novel at attractive terms- eg. a mining company having access to a mining site. But could also be team/person)
7. Process Power (significant processes or ways of doing things that have been embedded over a long period of time. This one’s pretty hard to come by and takes a long time to build)

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So how do we use this framework to assess early stage ventures at Paloma?

Whilst we would never rely on just one framework to assess businesses applying to our ventures program, the 7 powers are one lens that can come in handy, particularly when there’s disagreement or deep discussion amongst the team.

Here’s how/when we use it:

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Pitch Deck Stage

The only two Powers that can be determined at venture origination are: Counter Positioning and Cornered Resource.

Often we see early stage ventures who are planning to go head to head with big incumbents. It’s often hard to see the wood through the trees with these opportunities because it’s incredibly hard to predict how the incumbents will react.

Why aren’t they doing this themselves? Will they just copy the idea but with the benefit of deeper pockets?

Assessing for whether the new venture idea has counter positioning (ie. a product or model that would be very difficult or uncomfortable for the incumbent to replicate) or cornered resource (ie. access to a team, new technology or asset that the incumbent can not access) has been useful in these moments.

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Build Stage

At Paloma we work very closely with our ventures. We’re in the weeds with our founders to build their product together. When we start to build we’re looking for pull from the market and evidence that our hypotheses about the customer are correct.

The powers that are relevant at this stage are Scale Economies, Network Economies and Switching Costs.

In order to survive in the long term, our ventures should be optimising for either number of customers (bloody loads) or making it super hard for customers to leave (aka product stickiness). These things don’t come overnight but there should be a clear pathway to attainment.

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Growth Stage

Helmer claims that Brand and Process Power can only be attained over a long period of time.

I’m not sure I totally agree- I think there are lots of examples of companies who have managed to land into market with fantastic branding and subsequently, the ability to charge premium prices for something which is objectively not all that valuable. I think the key thing here is that it can all be undone in an instant. Brand is a long game and requires huge levels of trust from customers. Brand should be built in layers with customer trust increasing year on year. It’s a pretty simple lens to look at our portfolio ventures through.

Ultimately, by the time our ventures are out in market and have been operating for a few years, it should be very easy to identify which of the powers they are strong at, and which could do with some work. The aim isn’t necessarily to excel at all of them (theoretically you could just have one and be smashing it).  But if they aren’t nailing any of them, it’s a pretty good indication that they don’t have much of a defensible moat and could be overtaken at any moment.

If you’ve read the book and want a natter, hit us up at the links below or you can reach out to me personally on LinkedIn