Game Theory and Venture Capital

I recently came across political scientist Robert Axelrod’s work determining the best strategy for winning a repeated Prisoner’s Dilemma game. The surprising winner? A simple algorithm called Tit for Tat. It followed four straightforward rules: be nice, be forgiving, be retaliatory, and be clear.

Four principles undergird the effectiveness of the Tit for Tat strategy:

• Nice: Start by assuming positive intent and approaching interactions with goodwill.
• Forgiving: Forgiving honest missteps helps relationships recover and grow.
• Retaliatory: Kindness shouldn’t mean being a pushover. If someone repeatedly breaks trust, you need to respond decisively to protect the relationship’s integrity.
• Clear: Clarity in communication and consistency are essential. When expectations and actions align, trust builds naturally.

How does this relate to venture capital? For one, I believe in “investing in an entrepreneur’s career, rather than a single idea or company”. I believe long-term success in VC doesn’t come from a single deal or company. It’s a long-term game, played across multiple rounds, founders, and market cycles.

I think this is more crucial than ever in times of stress, which the Southeast Asia venture ecosystem seems to be experiencing in spades now, with founder fraud, poor VC performance and an uncertain global market. Some companies will fail, and many will fail to live up to expectations. Unfortunately, in times like these, we see more actors misbehaving and optimising for short-term outcomes rather than long-term ones.

I remain optimistic about the future of venture and innovation in Southeast Asia in the long term. There remain important problems to be solved, and we need the brave and the bold to step up to be problem solvers, whether this is related to energy transition, climate and sustainability, financial inclusion and productivity of nations, just to name a few.