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a16z Podcast | Getting Network Effects
30 segments available
One of the biggest misconceptions around network effects (which are one of the key dynamics behind many successful and highly defensible software companies) is confusing growth with engagement. So how does one tell the difference between viral growth and network effects? How does one create network effects in different businesses? (Hint: it's not by accident!) How do you know when to hang in there because you see signs of network effects or just drop it and move on to something else? And what are some examples of teasing all of the above apart? In this episode of the a16z Podcast -- based on an event we hosted and slide deck we released all about network effects -- a16z partners Anu Hariharan and Jeff Jordan (who cover all things marketplaces, consumer, and more) share (in conversation with Sonal Chokshi) their observations, insights, and experiences. Because, why reinvent the, er, flywheel?
Segments Timeline
Introduction to Network Effects
In this segment, Sonal Chokshi introduces the a16z Podcast episode focused on network effects, highlighting the misconceptions surrounding growth and engagement. Anu Hariharan and Jeff Jordan, both partners at a16z, are introduced, setting the stage for a deep dive into the complexities of network effects in software companies.
"hi everyone welcome to the a six in Z podcast I am sonal and today's episode is all about network effects and it's based on an event we did that was a bit self based on a set of slides that we release..."
Defining Network Effects
Anu Hariharan provides a clear definition of network effects, explaining how the value of a platform increases as more users join. She contrasts this with the concept of growth, emphasizing that true network effects are about the value provided to existing users, not just user acquisition.
"of those concepts that's really easy to learn but difficult to master so on that note let's just start off by defining what's a network effect yes simply put I think the simple definition is as more u..."
Growth vs. Network Effects
The discussion shifts to the critical distinction between growth and network effects. Anu and Jeff highlight the common misconception that high engagement equates to network effects, stressing the importance of understanding the underlying value that a network provides to its users.
"service to the users as more users join the platform so to be clear though it's growth and value but what's the difference between that value engagement isn't enough to just say we've got a lot of eng..."
Facebook's Retention Metric
Jeff Jordan shares insights into Facebook's early growth strategy, focusing on retention as a key metric for measuring network effects. He discusses how Mark Zuckerberg prioritized daily active users over mere sign-ups, illustrating the importance of user engagement in establishing a robust network effect.
"economics and things like that because if your service is more valuable than the other you're gonna create that value through throughout the entire process right and it's I mean things valuable for us..."
Bootstrapping Network Effects
The conversation explores strategies for bootstrapping network effects, with a focus on Facebook's initial launch at Harvard. Anu explains how targeted growth and user engagement strategies were crucial in establishing a strong user base before expanding to other colleges.
"and not just the viral growth in their users and by the way just think about the level of that number I was talking to mark in 2006 he reached out and asked to get together and we were chatting about ..."
Growth Hacks for User Engagement
Anu discusses various growth hacks that companies can employ to enhance user engagement and drive network effects. She emphasizes the importance of creating 'aha moments' for users, which encourage them to return and engage with the product consistently.
"build the user base and then the second step is you're sort of testing your product market fit as you grow the users and then what you have to quickly hone on what is the aha moment that gets the user..."
The Chicken and Egg Problem
The segment addresses the chicken and egg problem faced by marketplaces, where both sides of the platform must be developed simultaneously. Jeff shares insights on how OpenTable tackled this challenge by focusing on building a robust restaurant network before attracting consumers.
"out of you to get you to 10 friends it would be like you'd show up in like do you know these 12 people so one of the best hacks Mark had was um it's well known he got in trouble for it he hacked the d..."
Strategic Growth Approaches
Jeff elaborates on the strategic approaches companies should consider when aiming for network effects. He discusses the importance of local market penetration and the gradual build-up of user bases, using OpenTable's experience as a case study for effective growth strategies.
"entrepreneurs you're looking for the theory what's your theory on how you're gonna bootstrap yeah how are you gonna hit the flywheel spinning how you solve the chicken the egg problem which side are y..."
Market-Specific Strategies
The discussion shifts to the challenges of expanding OpenTable into new markets, emphasizing the need for localized strategies. Each city required a tailored approach, showcasing the complexities of building network effects in different geographical areas.
"flywheel goes by the way that was city by city so the fact that you had sufficient restaurants in San Francisco meant nothing in Miami so you started again in Miami and in Tokyo and in you know in uni..."
Global vs. Local Marketplaces
This segment contrasts the rapid growth of platforms like eBay with the slower, more deliberate approach needed for local marketplaces like OpenTable. It emphasizes the unique challenges of establishing network effects in local contexts compared to global ones.
"the strongest never I've worked with some great network effects businesses you know eBay PayPal Airbnb you know a Pinterest it's virtually impossible to displace open table from a restaurant right now..."
WhatsApp's Local Beginnings
Exploring WhatsApp's early days, this segment illustrates how the app initially focused on a small community to refine its features. The importance of understanding local user needs is highlighted as a key factor in its eventual global success.
"zones you're in so for example whatsapp right it went global really fast but it didn't start that way in fact the yarn used to hang out a lot at the Russian community in West San Jose and his the firs..."
Airbnb's Unique Challenges
Airbnb's journey is examined, focusing on the initial skepticism around renting personal spaces. This segment discusses how traditional marketing strategies and innovative solutions were crucial in overcoming barriers to entry in the sharing economy.
"started so contour anyway again counterintuitive because you see their growth and you're like wow they went global really fast which is true unlike you know like say Airbnb which took time to build cr..."
The Myth of Overnight Success
This segment debunks the myth of overnight success in startups, using Airbnb and Pinterest as examples. It emphasizes the long, challenging road to achieving critical mass and network effects, highlighting the persistence required in the early stages.
"trying to build a network effect yeah I think with Airbnb and it's a classic case of marketplace but strong network effects but they did not have any viral growth right to that because forget about re..."
Identifying Network Effects
The conversation shifts to identifying signs of network effects versus mere growth. Using Facebook as a case study, this segment explains how retention metrics can indicate true network effects, contrasting it with examples of viral growth without sustainable engagement.
"ability so what one of the founders stories so entertaining and so and almost always so patently false is the overnight success i dinner with brian last night he's been at Airbnb nine years I mean you..."
Medium's Growth Metrics
This segment analyzes Medium's growth strategy and the importance of measuring user engagement. It discusses how understanding the sources of traffic and user retention can provide insights into the presence of network effects in a platform.
"right so this is the chart usually startups sure at the start like hey we're growing really fast you can see that we reached you know eight hundred and eight hundred million plus I may use in a very s..."
Micro Indicators of Success
The final segment emphasizes the need for startups to focus on micro indicators of success early on. By examining localized metrics, businesses can better predict the potential for network effects and sustainable growth.
"the question you have to ask for network effect is depending on your business or company that you're building what is that aha moment that gets the user back to your site or your app without much effo..."
The Importance of Market Replication
This segment focuses on the necessity for businesses to replicate their success in different markets. The speakers discuss examples like Facebook's initial success at Harvard and the challenges of scaling in diverse environments. They stress that understanding local market dynamics is crucial for determining whether a business model can thrive outside its original context.
"they said ok this case if you build it they will actually come now different you know so we go into markets you know Zuckerberg is pretty obvious on Harvard it was working it wasn't necessarily obviou..."
Scalability and Local Business Insights
The discussion continues with insights on local businesses and their ability to scale beyond their initial markets. The speakers highlight the significance of testing business models in varied environments to ensure scalability. They provide examples of businesses that succeeded in affluent areas and the implications for replicating those successes in different economic contexts.
"everything's on here homepage and search for Oscar Peterson duck decoys and found like five and he goes I spend my summer driving around Michigan looking for these I went online in their five here and..."
On-Demand Services and Network Effects
In this segment, the speakers explore the rise of on-demand services like ride-sharing and food delivery. They discuss how mobile technology has transformed consumer behavior and the unique challenges these businesses face in achieving network effects. The conversation highlights the differences between supply-side economies of scale and true network effects, using ride-sharing as a key example.
"outside of Sand Hill Road every single day there'd be like three cherry guys washing VC's cars can I see this working in Minneapolis in the winter and you know you're just kind of like oh so I mean th..."
Hacks for Building Demand
The speakers delve into strategies for building demand in network effect businesses. They share examples from companies like Uber and Instacart, discussing how initial subsidies and marketing hacks can create a foundation for growth. The conversation emphasizes the importance of understanding user behavior and leveraging early successes to establish a sustainable business model.
"almost like the Amazon first party if you wanted to think of it we just like it's still a good business we just call it as different but just you know supplies that economies of scale which is scale e..."
Balancing Marketing Strategies
This segment addresses the balance between paid and organic marketing strategies in network effect businesses. The speakers use Airbnb as a case study to illustrate the challenges of acquiring hosts versus demand. They discuss the importance of return on investment (ROI) in marketing efforts and how understanding customer lifetime value can guide spending decisions in competitive markets.
"one fundamental problem is in a two sided network who shows up first besides this network effects deck you guys participated in a post we wrote around 16 metrics and 16 more startup metrics I think it..."
Understanding Monetization Timing
The conversation shifts to the critical question of when to monetize a business. The speakers discuss how different types of businesses, particularly marketplaces, can monetize earlier due to existing transaction flows. They provide examples like Facebook and OpenTable, illustrating how the timing of monetization can vary significantly based on the business model and market conditions.
"the thing we really try to tease out is if you're doing paid marketing is you know why are they doing paid marketing what's the ROI a return on investment from that marketing and is you know is it tru..."
The False Dichotomy of Growth vs. Monetization
In this segment, the speakers challenge the common belief that businesses must choose between focusing on growth or monetization. They argue that it is possible to achieve both simultaneously, especially in marketplace businesses where transactions are already occurring. The discussion emphasizes the need for businesses to capture value early on without sacrificing growth potential.
"so it's not that you don't spend it's surprising how a lot of the most valuable network businesses didn't spend virtually anything they they hacked they figured out the hack well I'll do one last ques..."
OpenTable's Unique Market Position
The speakers delve into OpenTable's journey and its competitive landscape during its early years. They discuss how OpenTable managed to thrive without direct competition for several years, allowing it to build a strong network effect. This segment highlights the significance of capital availability and strategic positioning in achieving market dominance.
"just a little bit like okay you've got a hundred people in the company and you can't have you know any on and you know you have to pick one or the other and no one else is allowed to cross over you're..."
Navigating Competition in the Restaurant Software Market
This segment explores the competitive dynamics faced by OpenTable in the restaurant software market. The speakers recount how OpenTable's ability to drive reservations became a key differentiator against competitors. They discuss the importance of branding and user experience in establishing a strong market presence, particularly in a fragmented industry.
"call on or Pinterest you know being one you know they were multi billion dollar value pre-revenue business um you know the question is yeah there is a legitimate one question but yeah I mean typically..."
The Role of Fragmentation in Marketplace Success
The discussion continues with an analysis of how market fragmentation can be both a challenge and an opportunity for businesses like OpenTable. The speakers emphasize that while fragmentation complicates initial aggregation, it ultimately becomes a feature that enhances the marketplace's value proposition. They reflect on how OpenTable leveraged this fragmentation to grow its user base effectively.
"dries up to your competitive set and you've got you know you've got access to capital or whatever it is it actually can be it can be an attribute in there but I mean if OpenTable had actually GrubHub ..."
Branding and Market Positioning Strategies
In this final segment, the speakers discuss branding strategies and the importance of maintaining a strong brand identity in competitive markets. They share insights on how OpenTable managed to create brand awareness and user loyalty through strategic partnerships and marketing tactics. The conversation highlights the significance of branding in establishing a marketplace's value and attracting users.
"hi I have a question for you that I think is maybe about branding but maybe not when you are at Open Table were you ever tempted to offer a private label version of open table for a segment of the pop..."
Creative Contributions to Network Effects
This segment delves into how user-generated content and data can enhance network effects. The speakers argue that when users contribute to a platform, it strengthens the network, creating a more valuable ecosystem. They discuss examples like Pinterest and the importance of product-market fit in fostering these effects, highlighting the evolving landscape of network-driven businesses.
"customers high do you believe in the idea of network effects with brands so for instance Nike the more people that think Nikes cool the cooler it gets the more people think Nikes cool and yeah I think..."
Navigating Adverse Effects on Network Growth
The discussion addresses potential socio-economic and political factors that can disrupt network effects. The speakers share personal experiences from significant events like 9/11 and the financial crisis, illustrating how external shocks can impact user acquisition and retention. They provide insights on how businesses can prepare for and mitigate these adverse effects to maintain growth.
"going back to your statement about comfort the tool and stay for the network or the community it seems like the some of the strongest network effects actually happened when people not only use a tool ..."
Resilience in Network Effects
In the concluding segment, the speakers reflect on the resilience required to manage network effects during challenging times. They emphasize the importance of capital and strategic planning in navigating downturns. The conversation wraps up with a call for further discussion, highlighting the ongoing exploration of network effects in various business contexts.
"example is 9/11 or everything kind of took a crash and if if you started a company that day odds are you would have very hard time getting customer acquisition same thing for you know at the onset of ..."