What we get wrong about network effects
By: Vardan Aggarwal
Tags: Network, Startup, Entrepreneurship, Social Media

Network effects are great. They are essentially the backbone of how we use internet today. From social media to e-commerce, content distribution to funding ecosystem best of everything has an inherent network effect. And it makes a lot of sense because that is the biggest power internet brings to us, creating large networks.

It is quite obvious then that anybody who is starting up now or for last 10 years have been imagining of building a strong network effect. Some of them might not know that but every entrepreneur I have met has had a vision of building a strong network effect.

But how many of them actually succeeding in building one, zero? So I learnt a lot of lesson from my own mistakes and of those around me. After having another conversation which was practically the same as every other I had in last few years, I decided it is time I find my way out of these conversations. So let’s begin.

You are always chasing chicken and egg problem

This actually goes without saying. Everyone trying to build a network effect will have to face the chicken and egg problem on day 0 and almost everyone knows that they have to hack one of them. What people get stuck with is which one of them to choose and how to really make it happen. So they end up being a headless chicken going to and fro between the two or more options they have. Most interesting thing is that they would always have a small enough pool of one of the resources they need but they will ignore that pool endlessly because they know that network effects work only when you have millions of users.

Offer value to individuals without a network

It is true that network effects kick in when you have large volume of users but unhappy users will never lead to any kind of network effect. All the big companies that inspire you for network effects, always offered value to individual people by going out of their way. Facebook hacked university server to get the entire college database on its servers, Medium built a great tool for writers, Instagram built a great image editing tool, Amazon built a huge database of books. When someone comes on your network then what do you offer them other than the value of network itself.

Medium and Instagram hacked by building tools for one set of users i.e. creators so that they can on-board them without the need of other set i.e. the audience. Facebook and Amazon hacked by building a repository of data that essentially faked one set of users (people’s profile/products) so that their is value for the other set (people looking for connections/buyers).

Find that one set of audience whom you can attract by building something very useful for them. You can either scrape a lot of data to fake volume of people on your platform or you can build tools that engage their attention and doesn’t involve networks.

Let’s (not) get people who have an existing network

Building networks is tough, so every hacker entrepreneur tries to hack his/her way. One of the most repeated strategy people look for is how do I get a few people who have a large network and convince them to bring their existing network with them. I call this asking people to solve your problems instead of you solving theirs. This looks like a great growth hack on paper and when you crunch numbers but I have never seen it work.

LinkedIn and Twitter used a similar hack but there is tweak to how it works. LinkedIn and Twitter brought a set of users who could attract very large volumes. But that they didn’t achieve this using a distribution hack where these big guys will ask their followers to join LinkedIn or Twitter. Instead they offered a compelling proposition for those people to be on their platform and have some fun and then they sold those people to everyone else.

If you feel you have the guts to pull it then you can go and find those great people who can bring entire communities solely from their charisma. If you are doing these then don’t go small, find the best and the biggest people in the industry and bring them on board. And yes you will have to sell a very compelling story to them, they don’t have idle time to waste and you can never pay the right kind of people to be on your platform. Don’t expect them to be inviting people on your behalf. Sell them like you would sell anything else and you will get enough buyers.

The key here is that no one will bring you their network but if they are famous enough then anybody and everybody will come to join you in a hope to connect with them.

We will pay people who bring their network

This is a perfect recipe for disaster. We go out, talk to a small influencer who is having a tough time generating value out of their idle network. We offer them free money if they just bring their network to our platform and it works for us. They are excited, this will work! Hurray!

They are excited? yes. They will invite people? yes. People will come? maybe. People will engage? why?

While it is all is about plausible and possible but there are a few fundamentals about human nature we miss here. If that influencer really had a strong enough network that they were generating a value out of it then you could never really afford them. They would be too busy doing whatever they are doing now. The ones you can attract with whatever small amount of money you are offering, their network doesn’t value them enough. They can’t engage their audience enough to generate value for themselves, they can’t really pursue them to generate value for you.

You are welcome to try but from my experience it is a huge waste of money and time.

I want to solve for distribution first

When you don’t have a critical mass for network effects, everything is tough. You are doing extreme amount of efforts for a minuscule amount of value generated. Imagine the amount of efforts amazon had to do to sell even a handful of books and most of it is never scalable. It makes a lot of sense to get a large enough audience and then solve the problem using cool products in an efficient way.

But it will never work until you can develop those scalable solutions in days. Imagine you don’t have a way to deliver books to individuals but if you have 1000s of orders per day then you can get a deal with a courier service and make it happen. Now somehow you cracked a way to get 1000 orders in a day. Can you scale the rest of your shoddy operations to fulfil those 1000 orders? When they scale most companies crash one part or another of their operations. They survive because they had spent a lot of time building those operations one piece at a time. When you choose to solve for distribution without ever solving the entire funnel for a smaller set of users you are acting like a dog chasing a car. If you get it, you won’t know what to do with it and how. The volume will kill you.

Interesting is most of the people respond to this with, it is a good problem to have. True. But none of them ever had that problem. Because they never solve for individuals they never know what they can offer to people to bring them on board they never end up having the volumes they were expecting. Not even a tiny fraction of it.

Unhappy customers don’t lead to network effects

When entrepreneurs find it tough to serve and satisfy the small audience they have, they try to blame the customer. The audience is not diverse enough, they are not good enough, they are not the right people and what not. And they find that building a larger network will somehow help.

It won’t. You start with the expectation that the growth hack you will come up with will bring you a different set of users or that currently you have 10 good users and then you will have 100 so everything will become easy. But that is not what happens. You will get the similar set of people and instead of having 900 unhappy customers instead of 90. Even if you see any kind of growth, you will have a lot more unhappy customers instead of happy ones.

If you are not spending a lot of your time making your existing customers happy and instead are chasing a much larger volume then you won’t have a network effect. You will just be too confused to solve any problems going forward.