Before anyone realizes that there is a network effect, you are already running. What does it feel like? This is the advantage of an implicit network.
The Translation Bureau is a compilation team that focuses on technology, business, workplace, life and other fields, focusing on foreign new technologies, new ideas, and new trends.
Editor’s note: “Network effects” is the foundation of many important projects in the Internet era. As more and more people use the Internet, the network will become more valuable to users. But now, this law does not seem to be enough. There are many successful companies that don’t seem to have a “network effect” in the process of development, and then have a network effect overnight, which is behind the “hidden network”. A16Z partner D’Arcy Coolican published a blog post detailing the characteristics of “hidden network” and its development. The original title of the article is “Hidden Networks: Network Effects That Don’t Look Like Network Effects“, compiled by you, I hope you can bring you inspiration.
In the Internet age, many of the most important projects — from Wikipedia to Facebook and Bitcoin — are based on “network effects,” that is, as more and more people use the Web, the network is for users. Will also become more valuable.
So, we have become very good at analyzing and evaluating network effects. The indicators used to identify strong and lasting “network effects” seem to be quite complete in terms of reducing customer acquisition costs, increasing liquidity, and increasing retention.
For many types of companies, these are real and effective. Using these tools, it’s easy to differentiate and analyze standard markets, payment networks, and many social platforms.
But for many companies, this traditional framework does not work.
There are many companies that have (or will have) strong network effects, but they don’t apply to these metrics, and their data doesn’t help you measure, track, or even identify them.
But their network effects are real, but they are hidden.
So, what does this matter?
Companies that have a network effect but don’t seem to have a network effect areUnpolished diamonds.
Because their network of relationships is difficult to measure, they tend to be undervalued in the short term and powerful in the long run.
Similarly, the best entrepreneurial ideas are good ideas that sounded terrible at first – because the obvious good ideas were chosen and the competition was fierce – those with the most powerful network effects The company is ultimately so powerful because they don’t seem to have a strong network effect at first.
Having a “like-and-zero” network effect creates unique advantages that lay the foundation for the company’s long-term success.
The most important thing is how this will affect the competitive landscape.
If the value of the early networks is not obvious in terms of quantity, then these teams and markets will receive less attention, and the number of imitators trying to develop similar products and similar networks will also decrease.
This gives the founder more time and space to develop products and build networks in an efficient, sustainable and defensive way.
Think about it, if online car companies or takeaway companies have years to build their own networks (and competitive advantage) before the competition, what they might look like.
Although implicit networks have their unique advantages, they also have various challenges: it is more difficult to raise funds with network effect theory rather than data. The financing time range is usually longer, more uncertain, and the ultimate strength of network effects. It may be very blurry.
So what is a hidden network? Here are three examples.
1, slow networks)
A slow network is the time delay between the creation of a network and the beginning of the emergence of network values.
Products in slow networks often use features such as long loops or infrequent use, which weakens network effects. Compared with fast networks, people tend to underestimate the value of slow networks, because the benefits it brings are not immediate.
Even if the company itself is growing rapidly, a slow network may take years to show its network effects and its value. In fact, some of the fastest-growing companies now have slow networks.
Fast Network vs. Slow Network
In the case of Lambda School, this is a full-stack education platform and one of the fastest growing startups today. It provides a programmatic learning program based on the Income Share Agreement and works hard to help students find work after graduation.
In theory, it’s easy to understand the network effects of Lambda School: as they recruit more (better) students, they should be able to:
(1) Find more employers who want to hire Lambda graduates
(2) Establish a deeper Lambda alumni network that allows recent graduates to rely on, learn, and get jobs.
This flywheel brings more and better students to the top of the funnel and brings more and better employers.
So, the network effect is a big win, right?
However, Lambda is a 30-week project where graduates can find jobs. Suppose an employer needs an extra few months to determine if their first Lambda graduate is a good employee.
So far, it has taken nearly a year to complete this single cycle.
Then, if a potential employer knows the resume of a student and wants to hire him. But it still takes a few hours for him to learn to complete, in order to hire him. At this time, it will take 7-10 months from the end of the cycle and other employers to see the value of Lambda.
So, the value of Lambda’s network effects is beginning to emerge and will take years. This is the logic for slow networks to work.
Lambda founders talk about the role of network effects in education
The advantage of slow networks is that once they are built, they are often difficult to replace. Top universities have spent hundreds of years building network effects, albeit from time to timePeople predict that they will die, but these network effects do not seem to show any signs of weakening.
Another example of a slow network is social lending. When I and my co-founder founded Frank, a social lending platform, we thought it would have a strong network effect.
We have established a network of relationships where people can borrow from each other. The more people each user contacts on the platform, the more valuable this platform is.
The network effect is obvious, right?
But because the frequency of borrowing is relatively low (our users are about once every three years), there is a lag between years when a node is added to the network and when it brings value to other users. Three years for a startup, it may be a lifetime.
When we were “seeding”, our slow network construction meant that our biggest challenge was how to survive in a few years in order to see them “flowering.”
The network of lending and education industries is usually a slow network, but it can also be easily applied to other areas, such as recruitment, medical or real estate, where the feedback cycle is long and the frequency of users is also used. Very irregular.
It is not so much a test of whether the slow network effect exists is a science.
A company with a slow network looks more like a linear business in the early days of development, rather than a network-enabled company.
However, although it is difficult to measure with normal network effect metrics, it is likely to have a slow network effect. Can be tested in two dimensions:
(1) Whether it has all the characteristics of network effects (for example, as nodes increase, products are more valuable)
(2) Whether the product cycle is very long or the user volume is not fully saturated.
If the answer is yes, it is worth investigating.
Once you discover a slow network effect, it’s important that everyone—founders, employees, investors, users—have the patience and the resources necessary to make the network grow and function.
Companies with slow networks often fail, not because network effects don’t exist, but because companies can’t stay long enough to make them work.
2.1, Unfinished networks
Unfinished network means that the network is temporarily incomplete due to a product feature or strategic decision. However, when the network is finally completed, the network effect will immediately show up.
An unfinished transportation network
Like slow networks, unfinished networks also suppress network effects, but they don’t appear in any analysis or metrics.
OpenTable is a successful example of an unfinished network. In the early days of development, OpenTable looked more like an ordinary SaaS enterprise than a network-enabled enterprise.
The restaurant pays OpenTable $200 a month for online reservations and inserts OpenTable plugins into their website.
When you see this, you will definitely feel that this is a very direct network effect, and did not find any network effects, right?
As OpenTable includes more restaurants, it also creates an opportunity for itself, making it the easiest place for diners to find restaurants.
Once enough restaurants are included, they can invest in consumer-oriented products such as websites and apps that help consumers find restaurants.
This way, they have completed the network. More consumers bring more restaurants, more restaurants bring more consumers, which means stronger network effects.
From another perspective, the first five years after the establishment of OpenTable, mainly focused on signing restaurants. It takes 10% of the restaurants in any community to become a product that consumers find useful, and then complete the network.
In the early days of OpenTable development, if you only looked at the network effects on the surface, you would miss the forest because of the trees.
Of course, the challenge is that unfinished networks are often not completed. The cemetery of the startup is crowded with companies that think they can complete the network but have not completed it.
In the supply and demand relationship, the situation is especially dangerous when the part of the network that needs to be completed is the supply part. Because most companies and employees register anything that brings them business.
Therefore, it’s critical to understand which part of the network you’ve built and how difficult it is to complete the entire network.
The key variable is whether there is an “emergency” demand on the end of the network that has not yet been completed. Are users willing to use your product to fulfill this need? Are they trying to help you complete the network?
If the answer is yes, then you are likely to have an “unfinished network.”
2.2, Throttled networks
Limited network refers to product workThe ability to make strategic decisions substantially limits the size of the network or user engagement, thereby masking the strength of the network effect.
This is very similar to an unfinished network because the signals released by both are weak. However, the unfinished network is missing a key part, and the current limiting network is complete, but limited.
Like an unfinished network, the current-limit network seems to have a limited network effect – until suddenly it is no longer restricted.
The social network of management personnel is an example. Chief, is a female management social networking platform. Think of it as the World Youth Presidents Organization (YPO), but it focuses on women in senior management.
It is still in the early stages of development, and its members are mainly:
(1) Participate in a tutorial or group discussion with your colleagues each month;
(2) Participate in a series of salon events and conversations.
Obviously, they are working hard to build a strong and valuable network. As more qualified women join, the community becomes more valuable. But if you measure it by traditional standards, it is hard to find its value.
In a company with network effects, you will see a drop in customer acquisition cost (CAC). However, because Chief is now interested in limiting his membership, they will review and confirm the qualifications of each member, and the waiting list is very long. Therefore, the cost of obtaining customers does not reflect the network effect well.
You may also want network effects to increase user engagement, but their participation model is currently fixed at monthly group meetings, so there is no opportunity to increase participation.
You may want to look for important metrics from the quality of the applicant or member, or refer to the company’s Net Promoter Score (NPS), but these metrics may be vague and imperfect.
In the short term, there seems to be no network effect in Chief. But in the long run, they may increase the value of the network by increasing participation opportunities, increasing pricing as network value increases, and even building deeper membership groups.
The ultimate performance of the network effect will depend on what the founders think is most effective for their products, and doing so does not require a lot of effort from the company.
In a way, Facebook was also a current-limit network. The original user must have a Harvard email address to join.
There will be an email address with a .edu suffix and everyone else. This is consistent with the definition of a current limiting network.
Although Facebook does not restrict people’s participation on the site (which makes the network effect more obvious), but it does intentionally limit the scope of the network.
This is an important difference between a current-limit network and a “private network.” In a sense, the current-limit network is only temporarily small, and the value proposition can support a larger network, but it is not yet possible.
In contrast, relying on exclusive social networks—dating apps like Raya, or member clubs like Soho House—are a few examples of their network effects.
Sometimes, the current-limit network is the founder’s intentional decision, temporarily restricting the business or operational aspects of the business, or short-term regulatory control, keeping the network on a smaller scale.
Sometimes, the small size of the network is not intentional, but rather due to poor implementation or weak technology, which limits the network.
If the factors that limit the network can be resolved, this is usually a good sign. It shows that the network is far more valuable than it seems.
To determine whether a network is a current-limited network with a strong network effect, the test method is fairly straightforward: what happens if a constraint (such as price, network growth, participation, etc.) is relaxed.
If the answer is positive or neutral, then it may be a network waiting to untie.
3, Latent networks
This network, also known as “for the network, stay for tools” network.
There are many companies that have developed tools or products before building a network. Delicious or Instagram is a typical example of a company that “sends for the tools and stays for the network.”
But some companies have established networks before developing actual products or tools. Think of it as “for the network, for the tools.”
These companies may be particularly powerful because no one knows what they are doing, and it is often too late to know.
The concept of this network is that you start by building a community like a network, where users interact, participate, and often create value for each other. Finally, introduce a product that catalyzes or amplifies the way the network works.
Before the launch of this product, nothing could measure network effects or commercialization, so it’s hard to really see the power and potential behind these networks.
This is a strategy that savvy game developers have been following for years. Even before the game is tested, they will create a Discord server to help gamers build communities and networks.
The most important thing is that this ensures a vibrant ecosystem when the game is released. This is important in social games because there are other players that can greatly improve the gaming experience.
Hypixel and PThe hoenix Point is two examples, starting with building a community that eventually becomes (or will be) a network in the game.
These potential networks are the most difficult to predict and the most difficult to implement “hidden network effects.” Often, these community participants are actually just the audience of the product, and do not form a potential network, which means that users get value from the central node rather than the network.
When community participants are just audiences, the process of developing a tool or product is more like a linear business—like a product that is directly consumer-oriented—rather than a network.
It is very difficult to distinguish whether a business is a network without a product or a participant with an audience type. Many well-known entrepreneurs believe that they have a network where people want to participate in each other, but later realize that they really have only a group of people who want to know their idols.
So, how do you know if there is a potential network waiting to be activated? In terms of two dimensions: one is the participation characteristics of the network, and the other is the consumption of the audience. Look at the network, whether users participate in each other or only participate in the central node.
You can try to ask yourself who will get extra value when a new person enters the community. If it is all (or at least some) community members, then it has a network effect. If it is only a central node, then this new person may be an audience.
4, hidden network is a hidden advantage
Although implicit networks have their own unique challenges – often requiring more patience, faith and capital – but in my opinion, implicit networks are a neglected type of company, and everyone should Consider creating or investing in such companies or working in them.
In the end, building a company with network effects is essentially a competition. It is always necessary to work hard to establish a network effect before the competitors to achieve a “magic turning point.”
This is why a hidden network effect is a huge benefit for entrepreneurs who gamble on their own network effects.
Imagine that before someone realizes that there is a network effect, you are already running. What does it feel like? This is the advantage of an implicit network.
Translator: Scale