the most powerful tool in startups:
network effects
here's what they are and how to harness them:
at uber and airbnb i saw the power of network effects firsthand
they create:
- exponential user growth
- increased revenue per user
- unmatched defensibility
they're the holy grail of the startup world (especially in highly competitive markets)
network effects happen when a product gets more valuable with each additional user who joins
uber -> more drivers = shorter wait times
slack -> more team members = better team communication
airbnb -> more hosts = more options for travelers
to fully harness network effects a startup must go through 5 stages:
1. the cold start problem
2. the tipping point
3. escape velocity
4. hitting the ceiling
5. the moat
@andrewchen first identified them in his book "the cold start problem" — here's how each stage works:
the cold start problem:
new networks must solve the chicken-and-egg problem
to do this, build a tiny (but self sustaining) atomic network by attracting the "hard side"
- FB -> a college (hard: popular people)
- uber -> a city (hard: drivers)
- slack -> a team (hard: managers)
the tipping point:
networks need a strategy to build more atomic networks at scale
1. invite only (ex. FB, gmail) -> drive fomo, better experience for early adopters
2. @cdixon's come for the tool, stay for the network. (ex. IG, dropbox) -> build a tool users want first
escape velocity:
sustained growth comes by building out 3 things:
1. acquisition -> leverage the network (ex. referrals)
2. engagement -> increase interactions (ex. recommendations)
3. economics -> improve monetization (ex. pricing tiers)
nailing all 3 can create a unicorn
hitting the ceiling:
at some point growth will slow due to:
- market saturations
- degradation of marketing channels
- increased churn
- lower quality engagement (trolling, fraud)
startups solve this by either:
- creating new products (google -> gmail)
- acquisitions (FB -> IG)
the moat:
mature networks must fend off competitors
incumbents can win by:
- drive higher monetization (pricing tiers)
- "fast-following" upstarts (IG copying stories)
but upstarts can still win by picking off niche segments and building their own atomic networks
if you're interested in learning more about network effects then apply to @launchhouse
we're a community of vc-backed builders with:
- cohort-based courses
- coliving retreats
- peer groups led by coaches
- fundraising support
- and more
apply 👇 launchhouse.com
if you enjoyed this thread:
1. follow @callmehouck for weekly threads on building startups
2. try my new free newsletter to become a more effective founder
getrevue.co/profile/houck
tldr on how to build network effects:
network effects happen when a product gets more valuable with each additional user who joins
win at each of the five stages:
1. the cold start problem
2. the tipping point
3. escape velocity
4. hitting the ceiling
5. the moat