Ep. 5 - Network Bonding Theory (NFX Masterclass)

SPEAKER_1 (0:00)

You're listening to episode five, focused on network bonding theory from the Network FX Masterclass here on the NFX Podcast. This episode is hosted by NFX general partner James Currier as he uncovers concepts behind your startup as a network, and that your goal as a founder is to bond people to that network. This will allow you to see that any person or asset that you bring to your startup network is bonding to that network in an implicit mathematical equation. To watch the course, visit nfx.com/masterclass.

James Currier (0:31)

Okay, so now we're going to talk about network bonding theory. I know that sounds a little bit boring, but this is actually the heart of how networks get formed. Now, years ago, we could see the effects of network effects, but we couldn't see exactly how they were constructed, like Legos or piece by piece. But now we can, because of Web 3, we've been able to see the software and the math and the people and the nodes of the networks all interacting. And now that we can see it, we can put language to it, and we can describe it and make it a tool for us to build our startups, all right? So network bonding. Look, software used to be the hard part about your startup. Software is getting a lot easier. What's hard now is community building, is building the network, is getting people and other things to bond to your networks, which is how to bond people to the network of your company, because your company itself is a network, okay? And companies have forever made implicit decisions about what to compensate people, how to pay nodes to bond to their network, right? Particularly in the form of shares and salary compensation. And at the beginning of a company, you will pay someone a lot more equity to cause them to bond to the network, and then you pay less and less, and really a power law, sort of geometrically declining rate at which you give out equity in your company, because once that network gets bigger and stronger, more and more people will join to that network. Now, what I'm proposing is that by being able to language it and see it and understand it, we can now make it a tool for building your companies. We want to take these historically implicit calculations that networks are making and make them explicit so that we can see them. And let me walk you through that right now.

So there's a mindset shift that you need to have in order to see what I'm talking about, which is you've got to go from the idea of a single player game to the idea of a multiplayer game. So if you're building a game of solitaire, that's a single player game. If you're selling a SaaS tool to an enterprise company, they buy your tool, they use it for their data, that's it. That's all it is. But if you think about how to turn everything you're doing into a multiplayer game or think of how what you're doing is a multiplayer game and you didn't see it that way, you will start, that's the easiest way I've learned, to help founders start to see what I'm talking about, which is how do I add other people into this game with me? What am I compensating them? What are they getting? What are they giving? What's the implicit arrangement we have with each of the nodes in the network we're bonding into this multiplayer game? So just keep that in mind as we walk through the examples I'm talking about, about how we can turn everything into a multiplayer game. Particularly, your company.

So let's talk about a network that you're familiar with, which is your startup. Okay. So you've got people you want to bring in. Employees, you've got customers you want to bring in to your company. You want recognition from a press or social media talking about them. And you want investors. You want people to bring capital into the business so you can grow it. Okay. So these are four nodes. There's more. But let's just say, look, you've got four different types of nodes that you are trying to bond to your network. You call it a company, but it's really a network. And at the beginning of that process, you might find a co-founder, and you split the company 50-50. So you've basically given 50% of the company to the very first node that's willing to join with you. Now, the next person that comes along, who's sort of the third person, how much equity do you think you're going to give them? Maybe 8%. And then the fourth person, what do you give them? Four? Fifth person, what do you give them? Two. So you've got this asymptotic sort of declination of your willingness to pay people to join on to your network. Then you go to an investor, and you say, I need to raise $2 million. And that investor gives you a seed check, and for $2 million, maybe they buy 15% of your company. But the next firm that comes along, they might give you $6 million for 15% of your company. And the next firm might give you $25 million for 15% of your company. And again, you've got a geometrically declining amount of equity you spend in order to get that new investor node to bond to your network. And we've been doing this implicitly forever, but let's make it explicit. Let's understand that that is a process you're going through. And I believe that over time, we're going to have software spreadsheets that will help us measure the value impact of every new employee, every new customer, every new investor, every new press release we get, that gets published around. And we're going to be able to calculate what we should be willing to pay, and when to walk away from a deal, or to bring a new node into your network. I mean, this is true, as you know, with your customers. If you were to land Nike as a customer, you'll be able to tell everybody else, Nike is a customer. They've made the decision to work with our software. They've made the decision to join our network. That's going to help you land other customers. You know there's a value there. Nike knows it, too, and they kind of want you to charge them less, but we don't have a formula for it. In the future, I believe we will have formulas for all these things because we will understand all the math about all this specific tactical network bonding that we're doing to companies. For instance, a skeleton we can use for this is to use maybe four factors in determining what you should be willing to pay a node to bond to your network. Number one, time. Time since inception of the company. The longer it is from the inception of the company, the less you're going to be willing to pay. Number two, the promise of the node. The node has some sort of following on Twitter. They have some sort of performance they've had in the past. There's some promise to them that you could probably measure in calculating what you should be willing to pay them. Number three is the engagement and performance they have after they bond to your network. For instance, if we use Twitter as another example, you could pay someone with a big following to join your Twitter network to grow out the graph and to grow attention into that ecosystem. But if they don't tweet, that's a huge problem for you. People will go to their profile, they'll see that they haven't tweeted, and they'll think, this Twitter thing is dead. This isn't cool enough for Koby to be tweeting. And so without Koby tweeting, it actually hurts your network to have Koby having bonded to your network. So you actually want to compensate each node for their performance after their initial bonding. And then the fourth thing to look at is, there's different curves you can use in declining how much you're willing to pay somebody. And here's an example in a graphic that shows you the various options you might have. But again, these four elements are a skeleton toward thinking about how you build a spreadsheet or even software to help you calculate what a new node is worth to your network.