Measuring a company's network effects?

It's like noticing everyone suddenly walking into walls because they're wearing VR headsets made for team collaboration. 'Is this the future of work or just really bad coordination?'

How to Measure Network Effects 

• Why Read:

  • Understand how to measure and leverage network effects, which are crucial for creating value in tech companies. It provides actionable metrics for acquisition, competition, engagement, and economics.

• Featuring:

  • Sahil S, VC at Stedu Fund

• Link: 

  • “How To Measure If Your Startup Has Network Effects.”

Key Concepts and Tactics:

• Understanding Network Effects:

  • Point: Recognize the importance of network effects in creating value for tech companies.

  • "Network effects are phenomena by which the value of a product or service increases when the number of people who use that product or service increases."

  • "If you look at the study by NFX you will find that - 'network effects are responsible for 70% of the value created by tech companies' since the Internet became a thing in 1994."

• Measuring Acquisition-Related Metrics:

  • Point: Track organic user growth and traffic sources to gauge network effect strength.

  • "Organic vs. paid users: What percentage of your new users are organic? In network-effect businesses, the proportion of organic users should increase over time as the network becomes more valuable, encouraging users to join independently."

  • "As networks grow, they should become destinations, generating more internal traffic and transactions. Tracking the ratio of direct vs. external traffic helps measure this growth in value."

• Analyzing Competitor-Related Metrics:

  • Point: Assess multi-tenanting and switching costs to understand your competitive position.

  • "Prevalence of multi-tenanting: How many of your users also use other similar services? How many users are active on similar services?"

  • "Switching or multi-homing costs: How easily can users switch to or use multiple networks, and what value do they gain?"

• Evaluating Engagement-Related Metrics:

  • Point: Monitor user retention cohorts and core action retention to measure network effect strength.

  • "Newer user cohorts should have better retention than older cohorts if a product's value increases with more users (network effects)."

  • "Retention based on users taking a core action (e.g. posting content on Nextdoor) is more indicative of network effects than just measuring logins or app opens."

• Assessing Economics-Related Metrics:

  • Point: Examine pricing power and unit economics to gauge the financial impact of network effects.

  • "As participants receive greater value from the network, they are willing to pay more to have access to the network, in the form of subscriptions, listing fees, take rates, or other monetization mechanisms."

  • "Improved network effects often appear in improved unit economics over time. This is a result of declining incentives that businesses need to offer to different sides of the market, a lower share of paid users, and an overall improvement in pricing power."

Navigating Conflicting Advice 

Why Read: 

• Understand how to navigate conflicting advice, evaluate information sources, and make decisions effectively in the complex startup landscape, avoiding common pitfalls like analysis paralysis and confirmation bias.

Featuring:

• Michael Wolfe (@michaelrwolfe), Co-founder, Chief Product Officer at Gladly, Inc.

Link: 

• “Embrace Contradiction”

Key Concepts and Tactics:

• Recognizing Contradictory Advice in the Startup World:

  • Point: Understand that startup advice often conflicts due to varying experiences and contexts.

  • "If you pick any topic, double-click on it, and go down the advice rabbit hole, you'll find great people giving intelligent, well-considered opinions that perfectly contradict."

• Embracing Contradiction in Startup Advice:

  • Point: Accept that contradictory advice is normal and can be valuable when properly contextualized.

  • "This conflicting advice should not be too surprising because: Every team is different... Every market is different... Every product is different... The financial markets always change..."

• Evaluating Advice Based on Source and Context:

  • Point: Consider the background and motivations of the advice-giver when assessing their input.

  • "Consider the source... A good filter for advice is to ask who is giving it. Consider what experiences the advice-giver has gone through and how they led them to their conclusions. Ask what role they have and what incentives and biases come with that role."

• Digging Deeper into Advice:

  • Point: Ask "why" repeatedly to uncover the core reasoning behind given advice.

  • "High-level advice, even when correct, is usually too superficial for you to put into action, but if you take the time to dig a few levels deeper, you may uncover some nuggets of wisdom you can use. You do this by asking, 'Why?' as many times as you need to until you've dug down into the core of what you are hearing."

• Focusing on Your Specific Industry:

  • Point: Prioritize advice from your target industry over general startup advice.

  • "As a startup founder, you operate in two industries. The first is the industry in which you are competing for customers. The second is the 'Startup Industry' itself... the advice you really need often comes from the industry in which you are selling."

• Avoiding Analysis Paralysis:

  • Point: Don't wait for a "right answer" before making decisions.

  • "Once founders get their startup going, they can over-research and over-analyze important decisions, assuming there is a clear-cut correct answer to the question of the day. This is rarely the case and can cause analysis paralysis and frustration."

• Being Aware of Confirmation Bias:

  • Point: Recognize and mitigate your tendency to favor information that confirms your existing beliefs.

  • "We all suffer from 'confirmation bias,' which is the tendency to focus on evidence that confirms what we already believe and to discount evidence that would force us to change our beliefs."

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