On Network Effects

Recently frustrated by founders misusing the ‘network effects’ concept (abbreviating to ‘nfx’ from herein).

Boils down to 2 main reasons:

1. Founders mistakenly thinking nfx is their moat or edge

2. Founders mistakenly thinking network value has a linear relationship with user growth

Founders mistakenly thinking nfx is their moat or edge

If you’re building a networked product, by definition, all your competitors also benefit from nfx! In light of this, focus on how you will uniquely wield nfx relative to your competitors.

Consider, for example, data network effects. Yeah cool, your product inherently means new users generate new & valuable data, but that’s also the case for all your current and/or future competitors!

What’s important here is not that your networked product is generating new data for every new user / user interaction, but how you will translate this data into a better product and/or biz model. Then, when raising, elucidating why you / your company is able to execute on that product <> nfx strategy relentlessly, creating a defensible flywheel [better than anyone else in the world]!

Imo, the best and most defensible moats are built around a potent mix of elite-level: 1/ proprietary tech, 2/ economies of scale in biz model, and 3/ brand. Nfx can accentuate those strengths and are necessary to build an enduring business, but not a silver bullet. 

Founders mistakenly thinking network value has a linear relationship with user growth

There’s this blind intellectual inheritance stemming from the origins of nfx… wake up! We no longer live in the world of the OG telephone network and Metcalfe’s Law, where every new user uniformly adds network value, starting with users 1, 2, 3, etc. No. That was hugely proven dumb AF during the dot-com era where operators, speculators, and shitcoiners got rekt. 

We use a new mental model now, which is ofc also flawed, but at least a bit better: value growth in a network looks like an S-curve, where your network has little-to-no value until some amount of X thing [users, apps, data, content, etc] is hit. This is the network’s ‘initial phase’ or ‘tipping point’ and getting past this is ‘solving the Cold Start Problem’. After this point, nfx kick in and value grows exponentially. 

What’s important for pre-seed/seed founders (often with a super early product & no nfx!) is 110% focusing on solving Cold Start (and not what your product/company will look like on the other side of the tipping point). 

This is generally best done by building a small, sticky, atomic network of initial users around a core niche (Harvard students for Facebook, wealthy SF techies for Uber, boujee LA kids for Tinder) and remaining laser-focused on: 1/ your core value prop, 2/ keeping super close to your earliest users & rapid iterative feedback loops, and 3/ community building.

If this resonates & you’re building a networked product, pls feel free to drop me a line / follow info on my website.

Fwiw, a great resource to learn more about nfx is Andrew Chen’s Cold Start Problem which I read a few months ago (see Goodreads link + online summary).

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