Viral Effects Are Not Network Effects

Network Effects are the foundation of many great Silicon Valley technology companies/ You need users to make a product work – network effects are the results of positively connecting people through technology which organically makes that technology better.

However, it’s also true that a lot of network-based utility only is realized at some level of scale. (As per NFX: “The simplified definition of network effects is that they occur when a company’s product or service becomes more valuable as usage increases.)

Network effects are defined as when the value of a company’s product or service increases as usage increases.That means the more users you have, the happier they are, and the cheaper it is to acquire new ones, which means your growth accelerates. Accelerating growth means exponential growth. You want to invest in and work at businesses that grow ex... See more

Chen talks about how Network effects aren’t one singular effect, but rather made up of three distinct forces:- The Acquisition Effect which allows products to tap into their network to drive growth in users more cheaply as the network grows- The Engagement Effect which involves user engagement going up as the network grows- The Economic Effect whic... See more

Virality is the phenomenon of users recruiting new users. When this occurs in a viral loop with a sufficiently high viral coefficient, the results can be explosive. Historically such rates have only been possible online. But new online-to-offline models create the opportunity for explosive growth in the real world. Entrepreneurs can exploit this by... See more

One important lesson here is that engagement matters to network effects. A first level understanding of network effects is that they occur when more users = more value for existing users. That’s true, but go one level deeper, and you realize it’s actually the amount of usage that matters.