A simple introduction to network effects
Recently, I have been reading a lot about network effects. I became interested in network effects when researching strategies for product defensibility. James Currier, managing directors of NFX has done a lot of fantastic research in this field and has inspired me to create this blog post. I wanted to put this together as a simple resource and also an exercise that you can use to add network effects and defensibility to your product or idea. Below is a great introduction video from NFX Youtube channel that I recommend watching.
Why are network effects important?
The definition of network effects is "a phenomenon whereby a product or service gains additional value as more people use it" Network effects are important as they help growth, retention and most importantly product defensibility. For example, creating an Instagram clone is pretty easy. In fact, you can get the code for free on GitHub and deploy with just one click - https://github.com/hibiken/hackafy, but you are not going to be able to compete with Instagram. For every new user that joins Instagram the more value the service gains for its initial users, Therefore the value of Instagram is not just in the technology, the majority of the value is held in the network of users.
How about WhatsApp?
Again, the code for a product like WhatsApp is freely available online, take a look, but how are you going to compete with WhatsApp? Users are not going to switch to your new service. This is something Facebook was clearly aware of when it decided to purchase the app for $19Bn not long after it launched.
The point is network = product defensibility
How to use the power of network effect in your startup?
NFX has compiled a list of 13 known types of networks. This can be used as a tool in two ways. The first is for idea generation, by being aware of such mechanics at pre-idea stage, you are a lot more knowledgeable of the power of network effects being backed into your core concept. The second way is to take your existing idea and think about how network effects can be used in your business. For example, what happens if you take Hipstamatic (pre Instagram filter app) and compile it with a personal network? You got it, you get Instagram. No idea is a bad idea, just explore the options and brainstorm ideas with your team using this framework.