Because products and services that are already popular will almost always come up first in search results, companies with a competitive advantage can quickly grow to the point where the increasing returns of network effects produce a winner-take-most or winner-take-all market. JC: Much has changed for distribution in the “mobile first” era. But the cold and unromantic fact is: a good product with great distribution will almost always beat a great product with poor distribution. RH: Many people in Silicon Valley like to focus on products that are, in Steve Jobs’ words, “insanely great”. JC: A lot of the Founders I meet with overlook the role of distribution in growth. Just one of these network effects would probably be enough to create first-scaler advantage all three working together built a massive strategic moat that protected LinkedIn from new entrants, and from attempts by consumer networks like Facebook to take away the professional market. The two-sided network effects occur because more users attract more corporate employers, while more employers increase the value of LinkedIn as a passive job-hunting tool.įinally, by becoming an integral part of most people’s professional online identities, LinkedIn has become a standard that has largely replaced the traditional résumé. The direct network effects come from the fact that each additional LinkedIn user makes the network slightly more valuable to all other LinkedIn users. RH: LinkedIn leveraged both direct and two-sided network effects, as well as becoming a standard format for presenting one’s professional identity. JC: How did you design network effects into LinkedIn’s business model? The irony is that many people in Silicon Valley couldn’t define a network effect or what caused it if asked. Much of Silicon Valley’s historical success in building giant companies can be traced to its cultural emphasis on business model innovation, which results in the creation of network effects–driven businesses. RH: The long-term value of LinkedIn was always intended to come from network effects. JC: When you built LinkedIn did you have network effects in mind? The increasing importance of network effects is one of the main reasons that technology has become a more dominant part of the economy. And the internet has pushed network effects to entirely new levels. The first three growth factors are important, but network effects play a key role in sustaining growth long enough to build a massively valuable and lasting franchise. Reid Hoffman: If you want to find your best business model, you should try to design one that minimizes two growth limiters: 1) product/market fit and 2) operational scalability.Īnd you should maximize four key growth factors: 1) market size (TAM), 2) distribution, 3) high growth margins, and 4) network effects. James Currier: What do you tell Founders who are trying to create innovative business models that can handle explosive growth? We sat down with Reid to talk with him growth and network effects, some of our favorite subjects. It’s a fantastic book on a topic that has rarely been written about. In his newest book, Blitzscaling, Reid shares his playbook for creating the massively valuable network effect companies that he’s developed over the last 20 years. Since then we’ve seen that network effects have been responsible for over 70% of the value created by tech companies because they can grow so fast and are so defensible.īut the fact remains: these businesses are …really… hard to pull off. At the time, Reid and I were part of a small group of people in Silicon Valley focused on viral businesses with network effects. I first met Reid Hoffman in the late ’90s when the social revolution of the web was just taking off.
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