The Network Effects Bible
Another great Wednesday night material I recommend to read to anyone who is creating a marketplace or a network type business. Below are my key take aways from the read.
“Network effects have been responsible for 70% of all the value created in technology since 1994 . Founders who deeply understand how they work will be better positioned to build category-defining companies.
1. Why Network Effects Are Important
Network effects are mechanisms in a product and business where every new user makes the product/service/experience more valuable to every other user.
2. How Networks Work
The critical mass of a network refers to the point at which the value produced by the network exceeds the value of the product itself and of competing products. This can happen at different times depending on the type of a network.
Most products with network effects must ultimately reach critical mass in order to fully take advantage of the defensibility provided by their network effects. Before the size of the network reaches critical mass, the product remains quite vulnerable and may not have much value to users. For such products, the challenge is often to build enough initial value to incentivize early adopters to start using the product even before the network effects value has kicked in.
3. Properties of Networks
Many network effect businesses require users to create a profile that’s visible to other nodes in the network. Networks with profiles tied to a node’s real identity, like your real personal name or real company name, are typically more effective at building network effects than networks with pseudonymous profiles (e.g. user-generated handles like “Tiger123”).
4. Building and Maintaining Network Effects
We don’t suggest building single-player-only businesses. They tend to grow linearly and get dragged down by competition.
5. Related Concepts”
Read the full article on NFX blog: https://www.nfx.com/post/network-effects-bible/
A nice essay about the evolution of marketplaces by Li Jin and Andrew Chen, both investors @ A16Z.
The first thing they say that the next trillion-dollar opportunity lies in services vs. goods. Why?
In the past twenty years, we’ve transformed the way people buy goods online, and in the process created Amazon, eBay, JD.com, Alibaba, and other e-commerce giants, accounting for trillions of dollars in market capitalization. The next era will do the same to the $9.7 trillion U.S. consumer service economy, through discontinuous innovations in AI and automation, new marketplace paradigms, and overcoming regulatory capture.
The service economy lags: while services make up 69% of national consumer spending, the Bureau of Economic Analysis estimated that just 7% of services were primarily digital, meaning they utilized the internet to conduct transactions.
There is a clear trend that software is eating the service economy, but it’s been slow, and they unpack the reasons for that in the article.
They also cover how marketplaces were evolving over the last decades, essentially in 4 eras:
1. The Listings Era (1990s). These marketplaces were the digital version of the Yellow Pages, enabling visibility into which service providers existed, but placing the onus on the user to assess providers, contact them, arrange times to meet, and transact.
2. The Unbundled Craigslist Era (2000s). Companies iterated on the horizontal marketplace model by focusing on a specific sub-vertical, enabling them to offer features tailored to a specific industry.
3. The ‘Uber for X’ Era (2009-2015). In the early 2010s, a wave of on-demand marketplaces for simple services arose, including transportation, food delivery, and valet parking. These marketplaces were enabled by widespread mobile adoption, making it possible to book a service or accept a job with the tap of a button.
4. The Managed Marketplace Era (Mid-2010s). Managed marketplaces take on additional work of actually influencing or managing the service experience, and in doing so, create a step-function improvement in the customer experience. Rather than just enabling customers to discover and build trust with the end provider, these marketplaces take on the work of actually creating trust.
The big question is, what’s next? My answer is Qoorio.
Watch the interview here: https://www.youtube.com/watch?v=zl14Ty5-0Ko
Read the article here: https://a16z.com/2018/11/27/services-marketplaces-service-economy-evolution-whats-next/
How to kickstart a marketplace business?
A nice piece written by Lenny Rachitsky, ex Growth PM @ Airbnb. He is sharing insights from 17 of today’s biggest marketplaces, including Airbnb, DoorDash, Thumbtack, Etsy, Uber and many more.
Sharing some of his learnings:
1. Constraint. With the exception of one company, every single marketplace that he interviewed constrained their initial marketplace to more quickly get to critical mass. To some this may seem counter-intuitive — why limit your growth and opportunities when you are starting out? It turns out that the best way to get big is by first going small.
2. Supply. The vast majority of successful marketplaces focused almost all of their resources on growing supply early-on (80% of the companies I interviewed, 14 out of 17).
3. Direct sales (supply). One-on-one direct sales ended up being a crucial lever for about 60% of the companies, twice as common as the next biggest lever (piggy-backing and referrals).
4. Word of mouth (demand). Word-of-mouth was the most important growth channel for over half of the companies. Though this isn’t actually a growth “lever”, it was an enormous growth driver for these companies, and was a strong early signal of product/market fit.
Three Types of Marketplace Shifts: Changing Without Breaking The Marketplace
“Making decisions about shifts in value, control, or risk is hard. It’s scary. Perhaps the shift will offset the special equilibrium of trust and value that exists in the marketplace...mechanics you may privately confess not to even fully understand.
And it’s emotional. While that’s true for any change or big decision at any company, it’s doubly true when the company is serving multiple customers at once. In a marketplace business, different parts of the company will, by design, see themselves as allied with one of the marketplace parties more than the others. Sales will advocate for the supply side. Marketing may advocate for the demand side. Product teams, depending on their focus area, will have a bias for their segment or constituency. And Finance, Legal and Policy teams will often lean towards more control, more value, and less risk for the business. This type of partisanship shouldn’t be disappointing to you. It’s ultimately a good thing! It's checks and balances. But it can result in some charged debates when marketplace shifts are required.”
Full article: https://www.giladhorev.com/posts/three-types-of-marketplace-shifts-changing-without-breaking-the-marketplace