The Evolutionary Game Theory of a Startup Ecosystem — and Why it Matters for Founders
Game theory is fascinating. Understanding the strategies of cooperation and conflict between yourself and the people you engage with can be immensely insightful when trying to assess what set of behaviours you should apply in your interactions. However, what happens when we start modeling micro-level behaviour into a broader system, such as a startup ecosystem? And even more interesting: how does a certain set of behaviours influence an ecosystem over a longer time span?
When I graduated university a few years back, I did my master thesis around startup ecosystems and how to build them successfully. It continues to be a great interest of mine, especially when coupled with systems thinking. This will be my short exploration of what I’ve learned over the years, put in the context of game theory.
Evolutionary Game Theory — a Primer
Part of why game theory is so interesting is the sheer amount of fields where it can be applied. Everything from economics, psychology, and biology has seen game theory advance the understanding of their respective fields. And it’s in the latter field that we find the concept of evolutionary game theory.
In biology, game theory is used to study the evolution of populations over time. Basically, within any ecosystem that displays Darwinian competition, we’ll see a set of actors applying different strategies for long-term survival and reproduction. Depending on the underlying rules of a given system, this behaviour will result in a new generation of actors emerging after a round of the game.
Let’s put this into the startup context. Imagine a ‘speed dating’ scenario where founders and investors are negotiating a deal. Via either cooperating or exploiting their counterpart, they can do either a fair deal benefitting both parties equally or try to exploit and get a better deal for themselves at the expense of the other. After round one, all actors switch tables and we now have a new generation. The new generation takes the outcome of their previous interactions into consideration when determining what strategy to apply in round two.
Thus over time, the system will reward a certain kind of behaviour while punishing another, based on the strategy most actors apply. For instance, if founders always cooperate no matter what, it’s easy for investors to keep exploiting. If founders start only cooperating with equally cooperative investors, the exploitive ones will either change their strategy or go extinct over time.
This is, of course, not limited to the relationship between investors and founders. In all areas of an ecosystem, these interactions take place daily. It’s their cumulative outcomes that determine how the game is played and how the rules for success will evolve over time. But what strategy should you use to ensure an optimal outcome for yourself and the ecosystem as a whole? It turns out there is actually a correct answer.
Tit-for-tat is the winning strategy of Robert Axelrod’s famous 1980’s game theory competitions. It applies the simple strategy of always assuming that its counter-part will cooperate. From there, it simply just copies their last move. Thus you will only fool it once, but you can cooperate with it indefinitely. This turns out to be a highly effective way of living in real systems as well. More on that later.
An even deeper understanding of this strategy and it’s evolution, can be gained by spending 30 minutes on Nicky Cage’s game theory simulator ‘The Evolution of Trust’. It’s a worthwhile investment.
How does this Apply to Startup Ecosystems?
All the theoretical stuff aside, there is a real-world application to this when looking at the evolution of a startup ecosystem. If you examine the most highly-evolved startup ecosystem on the planet, Silicon Valley, you’ll see that its behaviour looks surprisingly similar to tit-for-tat. The ecosystem is highly cooperative among well-intentioned actors and punishes bad actors with its high level of transparency around individual behaviour. The more cooperative the actors in the ecosystem are, the more cooperation is rewarded by the system. Thus Silicon Valley evolves via a positive feedback loop.
But what happens in less developed ecosystems? In his book Startup Communities, Brad Feld describes how the actors of developing ecosystems often default to playing zero-sum games, as the lack of transparency and connectivity means that the system won’t retaliate effectively against the exploitive behaviour. As there is an overweight of exploitive actors in the system, this kind of behaviour will not be punished accordingly.
Before you pack your bags and move to Silicon Valley, there is a caveat to this theory. A system doesn’t necessarily need an overweight of good actors to thrive in the long run. If only a small subset of actors manage to find each other and cooperate inside a system, they will over time outcompete the bad actors. The reason being that cooperation has a positive multiplier effect — exploitation doesn’t. Remember the speed-dating example: if enough people start to collaborate, the bad actors will change or go extinct over time.
What does this Mean for Founders?
Entrepreneurs are fundamentally the lifeblood of any startup ecosystem. When their companies succeed, investors get paid, economies grow, jobs are created, and communities evolve in a positive direction. Therefore, the rest of the ecosystem should seek to collaborate around making founders successful. But as we know, short-term thinking can corrupt any human being into exploitive and selfish behaviour.
As a founder concerned about the ecosystem around you, it’s your responsibility to actively lead the development of a cooperative feedback-loop. The easiest way for you to do this is to be ultra-transparent about who created value for you and who screwed you over. In the long-term, this is the only way to properly promote a cooperative evolution. So although showing up to events and network mixers can seem like time-consuming, they serve an important purpose. Help other founders make informed decisions about who they collaborate with. Engaging with other entrepreneurs is your strongest tool for developing a positive ecosystem.
It can be hard as a founder to take a meta-view of the broader ecosystem surrounding your startup. You’re hyper-focused on growing your company, just as you should be. But here is my plea: each week, commit to doing at least one thing that pushes your ecosystem towards collaboration. Whether it’s a tweet, going to an event, or hosting a meet-up for other founders. Your micro-actions will, over time, change the ecosystem in a more prosperous direction for everyone. Before you know it, Silicon Valley might not even seem that attractive anyway.
This piece was written by Christian Jantzen, the founding partner of Futuristic.vc. If you want to follow my writings, my twitter is @chrjantzen.
Futuristic.vc is a early-stage VC firm based in Copenhagen, investing all over the Nordics. We invest in beautiful minds building epic companies. You are welcome to reach out with comments or feedback at christian@futuristic.vc.
