May 15, 2023

Network effects

Network effects

Network effects > user-friendliness

I think Linkedin is the perfect example of this. The product is terrible and the company is worth $30b.

While we were raising our very first angel round when starting Stockly in 2018, Eduardo Ronzano whatsapped me after our first call a very complete blog article about network effects. He told me that reading it would allow me to convince him during our second call (which worked perfectly thank god).

In today’s world, the top companies’ success is more based on network effects than amazing products. Of course it’s super hard to attribute the success to one specific factor, but stil it’s quite intuitive, and we see plenty of examples of this around us everyday.

Network effects (NFX) create huge defensibility - eg: the fact that it will be super hard for future competitors to overtake you. There are many different types of NFX.

A Marketplace business (Uber, Airbnb, …) builds defensibility in the sense that each side of the platform gets more value out of the product as the other side grows: more housing on Airbnb ➡️ better offer and better prices ➡️ more users ➡️ more flat owners want to join the party …

Social networks build defensibility in the sense that you want to join the network where all your friend are active. If no one use the app, it’s pointless. If everyone uses it, you have zero reason to use another app with equivalent features.