Sharing this excellent video defining Network Effects, by James Currier, Managing Partner of NFX from https://www.youtube.com/watch?v=aoeal3ljnqw

Network effects (NE) is a phenomenon whereby a product or service gains additional value as more people use it. It is what goes on behind the scenes (like an invisible hand, or wind) that make businesses like Google, AirBnB, eBay and Facebook such defensible businesses.

NE is 1 of 4 defensibilities that a business can build
It’s about adding value to users, making the business more defensible (or a moat). At a point where there is critical mass, it can offer increasing returns to scale.
Other more traditional defensibilities are Scale, Embedding and Brand, and these usually taper at some point, with decreasing returns to scale.

NE is not the same as Viral effects, which is about user acquisition and growth. This is about retention and adding value to users and it provides a leverage to growth and defensibility.

NfX has defines 15 different types of NE and it’s worth considering how to add this into the designing of your business.

For those that are interested to learn more
(1) Great articles – NFX has provided an excellent resource of their thoughts/ learnings at www.nfx.com. Another great resource is https://platformchronicles.substack.com/.

(2) An upcoming course – those that are looking for a course to attend to discuss and go more in-depth on these concepts could explore the “Building and Investing in Network Effects” by Andrei Hagiu and Julian Wright. They are having a 2nd run in February with the sign up here. I attended the 1st run in late 2021 and it was very insightful, I highly recommended it.

JS, 9 January 2022

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#networkeffects #investing #vc #startups #platformeconomy