Ep. 1 - Why Network Effects Are Mission Critical (NFX Masterclass)

SPEAKER_1 (0:00)

You're listening to Episode 1, Why Network Effects Are Mission Critical, from the Network Effects Masterclass, here on the NFX Podcast. To watch the course, visit nfx.com/masterclass.

James Currier (0:17)

The world can often seem chaotic, but underneath that apparent complexity, there's actually some wonderful, simple math. Once you see it and understand it, the world gets calmer, and you can follow that math to your destination. If you're gonna be spending your life's energies building a startup, it's gonna take 100% of your effort. You're trying to defend the business area that you've carved out. You might as well be working on a business that has network effects, because then you'll have a shot at going the distance and making a real impact in the world and creating true value for your employees, for your investors and for your whole network. I'm James Currier and welcome to the Network Effects Masterclass.

Over the last 20 years, we've built 10 companies that have exited for over $10 billion. We've also invested in hundreds of companies, most of which also had network effects. Companies you've heard of like Lyft and DoorDash and Patreon and Goodreads, that used network effects to grow and build their defensibility and went on to great success. So we've seen the failures and the successes, we've seen the tactics and the details of what it takes to grow these network effects. And with all that company building, with all those investments, what we noticed was that when the companies had real network effects, their success was 10, 20, 30x what companies were when they didn't have network effects. It was the most important factor in determining what would be a successful startup and what wasn't. In fact, between 2012 and 2018, we studied it, we kept track of it, and noticed the math is that 70% of all the value created in the technology sector is created by companies with network effects, and only 30% was created by companies without network effects. And once we saw the network effects playing out in these startups, it was clear to us that they were also playing out in how our lives went, and how the politics was going, and how economics actually worked. We started seeing this everywhere. Once we saw it, once we understood it, we couldn't unsee it. And that's why we're doing this master class for you. Once you learn this way of seeing, you will not be able to unsee it. You will see these patterns everywhere. And the world that looks kind of chaotic on the surface is actually not as chaotic. It's actually quite understandable once you understand the network principles. And we're going to teach you about the tactics and the nuances and all the different types of network effects. But the fundamental idea about network effects is that the more users a product has, the more value every user gets from that product. That's the kernel of the idea of network effects. Now, how that blossoms and flowers and its multiplicity of expressions, you will learn in this master class. Okay, so let's get started.

You know, network effects are important because they're really at the engine of what's creating economic wealth in the world today. They're at the engine of how politics works, how society works, economics works, yet so few people see them and understand them. It's like this hidden engine of the world that people aren't discussing, and we hardly have the language for it. And so what we want to do is bring out that language, bring out that understanding. You know, I first learned about Network FX in 2004 I sold my first company Tickle to monster.com, and we were a fast growing, user-generated content site with matchmaking and social networking and test-taking, a lot of user-generated content. We were bought by this $7 billion company, and when we got there after we'd been acquired, we realized that they were horribly run. The way they talked to each other, the processes they had in place, the metrics they were using were inferior to the way we were doing it, yet they were buying us and not us buying them. And what we realized is the reason they were able to do that was because they had stumbled into a network effect in 1997 And that network effect allowed them to run the company horribly, but still make a billion dollars in revenue a year, and they could go to sleep and they would wake up the next day and their business would still be there. And when we saw that, we realized we've got to study this stuff. We've got to understand what makes this work, because we've discovered something important. You list out the companies you admire, you list out the companies you think have impact, I will bet you they've got network effects in them. Salesforce even developed a network effect over time, even though they started without one. Very impressive. Apple started without one. Eventually, they got to iOS. Eventually, they got to their network effect businesses, and now, they went from 40 billion to almost 2 trillion in value, built on top of these network effects. We saw the pattern again and again, and that's why we called our firm Network Effects, and that's why we've been publishing about it for the last few years. These things are incredibly important to value creation. You're trying to defend the business area that you've carved out, and the network effects are the best way to do that in the digital age. Durable competitive advantage. Where is that going to come from? It's going to come from four different defensibilities, but generally, it's going to come from the greatest of those, which is network effects.