Network effects. It’s one of the most important concepts for business in general and especially for tech businesses, as it’s the key dynamic behind many successful software-based companies. Understanding network effects not only helps build better products, but it helps build moats and protect software companies against competitors’ eating away at their margins.

Yet what IS a network effect? How do we untangle the nuances of ‘network effects’ with ‘marketplaces’ and ‘platforms’? What’s the difference between network effects, virality, supply-side economies of scale? And how do we know a company has network effects?

Most importantly, what questions can entrepreneurs and product managers ask to counter the wishful thinking and sometimes faulty assumption behind the belief that “if we build it, they will come” … and instead go about more deterministically creating network effects in their business? Because it’s not a winner-take-all market by accident.

Additional credits: Chris Dixon, Jeff Jordan, Sonal Chokshi, Kathy Wang

[slideshare id=59206938&doc=networkeffects-v6final-160307161248&w=650&h=500]

  • Anu Hariharan is a partner at Y Combinator's Continuity Fund focused on growth stage investments. Prior, she was an investment partner at a16z and principal at BCG's Private Equity practice.

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