#2 - Network Effects with Anu Hariharan

**Craig Cannon** (0:00)
Hey, this is Craig Cannon, and you're listening to Y Combinator's podcast. Our guest today is Anu Hariharan.
Anu is a partner at YC Continuity, which is an investment fund dedicated to supporting founders as they scale their companies.
Prior to YC, Anu was at Andreessen Horowitz, and one thing she worked on there was a pretty extensive study on network effects, which is what we're going to talk about in this episode. All right, here we go. Hey, everyone. Today we have Anu Hariharan, and we're going to be talking about network effects. So Anu, you're a partner at YC.
Would you mind giving us some background?

**Anu Hariharan** (0:30)
Sure. Happy to. I'm an electrical engineer by training, and worked at Qualcomm in San Diego. This was the pre-iPhone days when we were trying to design mobile video streaming all the way integrated to the stack.
After spending many years at Qualcomm in San Diego, I went to business school, worked at BCG for a bit, and then prior to joining YC, I was at Andreessen Horowitz, focused on consumer tech investments, so had the opportunity to work with a lot of great YC companies like Instacart, Airbnb, and a few others.

**Craig Cannon** (1:04)
Awesome. You also published this network effect deck at Andreessen Horowitz, so you've kind of become an expert in the field.
So just to start out, can you define what a network effect is?

**Anu Hariharan** (1:16)
Sure. I think the simple definition of network effect is basically as more users use the product or service, it's more valuable to the people using it.
So simple example, Facebook. The more friends that join Facebook, the more powerful the network became because it was easier for you as a user to connect with more friends and exchange messages. And now you see the news feed, and so you see a lot of content shared. So the more users that join Facebook, the more powerful it is even for the existing user base.

**Craig Cannon** (1:52)
Cool. And then there are a couple terms thrown around in that space as well. So that virality and growth, could you define each of those as well?

**Anu Hariharan** (1:59)
Yes. I think, see, I mean, if you take a step back, growth is what is confused with network, network effect. And it's very easy to confuse the two because when you are a startup, and if you have a really valuable product that provides inherent value, you're growing really fast. And so what happens is the common misconception is you think growth is equal to network. And there are different forms of growth, and that's where virality comes into the picture.
I think virality is actually about the speed of growth.
It's not about the value. So what's the difference? So, you know, it could be word of mouth. So in the early days of Uber, for example, you know, when people took the right point to point or arrived at an event, they would rave about the service to other users because it was 10x better than using a taxi and, you know, over time became cheaper. So that helped drive word of mouth growth. And so virality is often about free growth, meaning unpaid growth, which you can drive without marketing because your product is just much superior to the alternate option available. Network effect, on the other hand, is about value. What does the network offer in terms of its value? So, for example, Facebook. How would you know whether it had a network effect in the early days? It really is about usage, which in other words translates to retention. So it's different from growth. So in the early days of Facebook, even though they were growing quite fast, I would say reasonably fast when compared to apps today because it was first a web service.
The retention improved, meaning if you looked at their daily actives to monthly actives in the early days, as they added more users, that percentage kept improving. And so that retention is the sign of network effect because existing users were willing to log in more frequently and be more active because the service was more valuable.

**Craig Cannon** (4:05)
And so what's a good example of virality, like an app that everyone knows about? That was viral.

**Anu Hariharan** (4:10)
I think a lot of apps out there are viral. If you ask me, Facebook's early days were viral growth.
Airbnb didn't have as much virality. I think they did have virality in this, as they had word-of-mouth growth, but the product itself didn't spread as an organic consequence of its use. So let me define what that is. So if you look at Facebook, the reason why it grew quite fast was because if you were one user on Facebook, it was not that useful. I mean, the early days, the app was launched to see the online student directory.