Ep. 6 - Case Studies: Network Effects In Action (NFX Masterclass)

SPEAKER_1 (0:00)

You're listening to episode six on Case Studies, showing network effects in action from the Network Effects Masterclass here on the NFX Podcast. This episode is a montage of network effects in the wild that are under the hood of these top tech companies like Trulia, Meta, Uber, and even Bitcoin. For the best experience of this episode, be sure to watch these case studies at nfx.com/masterclass, or by searching on YouTube to get the visual side of these deep dives.

James Currier (0:29)

Okay, so now that you understand the core ideas and the concepts and the language around the different defense abilities, as well as the 16 network effects, now my partners and I are going to walk you through a bunch of case studies so you can see how these things play out in action in the real world. And I want you to pay close attention to how these defense abilities reinforce each other and how the network effects reinforce each other as you move through the seasons of building your company from tiny seed to giant, impactful company in the future.

SPEAKER_1 (1:00)

You're now listening to The Network Effects of Trulia.

Pete Flint (1:04)

So it was the summer of 2004 I was a grad student at Stanford, and I'd just gone through a kind of painful home search. It was also the summer that Google went public.

So the buzz in Silicon Valley was around Google. I got a ticket to a real estate conference, so I sat at the back of this real estate conference. And I remember driving from San Francisco back to Palo Alto. There was this kind of eureka moment. Huh, what if we applied the sort of Google search model to real estate? That was it. I was committed to it. So the core problem in a two-sided marketplace is solving the so-called chicken and egg problem. How do you get supply which drives demand, which drives supply? How do you kickstart this? The first way we solved that problem was to index websites. So we'd go to brokers and say, hey, can we index your website and put your listings on Trulia for free to demonstrate the value proposition. The other key network effect that we added was a data network effect. And we used the scale and data that came from our users to improve the user experience. Everything from a recommendation system. So just like Amazon, you like this home, you'll like these other homes. So the protocol network effect was key for us in the early days. Standardizing real-time XML updates, bringing real-time data from the fragmented MLSs and broker websites published on Trulia. We realized early on, we would not take money on every household. But we got massive fragmentation, which makes it incredibly hard to monetize. We focus on working with the biggest corporate clients in the industry. In Q2, Q3 of 2008, everything changed.

SPEAKER_4 (2:46)

This could be the most serious recession in decades. And that means life, as most Americans know it, is about to change, in some cases dramatically.

Pete Flint (2:55)

These large real estate companies were struggling. They were laying off people. Housing transactions collapsed. Our advertising agreements evaporated. Business was in decline, as every other real estate company out there. So up until that point, our revenue came from a small number of big franchisees, brokers, and mortgage banks, who were paying a lot to advertise with us. But when the crash hit, their marketing budgets were just too far removed from the actual transaction for them to see a direct ROI. They were forced to pivot to targeting individual real estate agents who could see an immediate ROI. Looking back, this was a bet the company decision, because we had to change direction completely while the market was collapsing around us, and we were running out of cash. But in the end, it paid off big time.

We went from zero revenue growth during the recession to doubling year over year, allowing us to go public in 2012 and merge with Zillow in 2015 in a $3.5 billion deal to create Zillow Group. M&A helped to quickly increase defensibility of the core marketplace business, providing scale and moving to a more powerful kind of network-effect defensibility. So I think of Zillow Group today as a company that has really evolved into something of a market network, which combines the core marketplace businesses that you think of as truly in Zillow with a SaaS-based tool, the Premier Agent app. The third component was the acquisition of DotLoop, a transaction management platform providing the network. So you've got today this incredibly defensible platform, a market network for the real estate industry.

SPEAKER_1 (4:31)

You're now listening to the network effects of Facebook, now known as Meta.