How do companies get really big?

In venture investing, the most common model is to invest in a portfolio of companies out of a fund. You hope that a few are big wins, a few are slight wins, and the remainder is not impactful on fund returns.

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Companies must have the potential to be very large to make that model work. Only a few are expected to return enough so the fund can return a multiple of invested capital. If we can't do that, our limited partner investors aren't happy, and neither are we.

We often see companies pitched to us that are not likely to be large enough to make our model work. That doesn't mean they can't be great businesses.

How do you know if a business can be huge?

Until now, I haven't had a framework to explain this to people concisely.

In a new favorite book of mine called 7 Powers: The Foundations of Business Strategy, author Hamilton W. Helmer presents his framework for "power." He defines it as the ability of a business to profit large margins from a market over an extended period.

His belief is there are seven ways that businesses can achieve Power over a market. Most of us are familiar with things like economies of scale, network effects and brand. But, there are four more.

I highly recommend this book if you're thinking about business strategy or investing. Here's an interview with the author as well:

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