Network Effects

Network Effects and Examples

I was instantly drawn to this question because finding a network effect, in the VC world, is classically regarded as the first step to finding a “unicorn,” or billion-dollar company. Network effects, speaking simply, is the effect of growing user bases generating value specifically because they are growing. Facebook is probably the most ubiquitous example of this effect. Facebook only became valuable because the number of members kept growing. New users were encouraged to join to access their friends on the website, but were no one on Facebook, no one would want to join. Therefore, as more friends joined, the value proposition was even stronger, because users could interact with growing numbers of people. This effect allowed Facebook to blossom into a social media giant. Many businesses seek to generate a network effect, but it is easiest to achieve in the software and tech space, in my opinion. For example, there are few opportunities for network effects in the consumer space. If I buy Pepsi, for example, your decision to buy Pepsi is not influenced. I have not generated more value to you from my purchase. Network effects allow exponential growth for a business, but, as illustrated above, are difficult to come by. Network effects generate value not only in terms of revenue and profit, but a stronger value proposition, which is the core of the exponential growth that they enable.