How to Start and Scale Network Effects

By Andrew Chen

If there aren’t enough users on a social network and no one to interact with, everyone will leave. If a workplace chat product doesn’t have all your colleagues on it, it won’t be adopted at the office. A marketplace without enough buyers and sellers will have products listed for months without being sold. This is the Cold Start Problem, and if it’s not overcome quickly, a new product will die.

Part 1

Network Effects

• In simple terms a network effect describes what happens when products get more valuable as more people use them
• In reality there are weak advantages to being first, since the winning startup is usually a later entrant
• Metcalfe’s Law - each time a user joins an app with a network behind it, the value of the app is increased to n^2
  • Anyone who has ever built a networked product from scratch will tell you unfortunately, Metcalfe’s Law is painfully irrelevant
  • Simple, academic model that fails the test of real-life messiness
• Meerkat’s Law
  • If a messaging app doesn’t have enough people in it, some users will delete it. And as the user base shrinks, it becomes more likely that each user will leave, ultimately causing inactivity and collapse of the network.
  • If you don’t apply the spam detection, algorithmic feeds, and other ideas, quickly the networks becomes unusable. But add the right features to aid discovery, combat spam, and increase relevance within the UI, and you can increase the carrying capacity for users
• Five primary stages:
  1. The cold start problem
  2. Tipping point
  3. Escape velocity
  4. Hitting the ceiling
  5. The moat