Networks have been around for a long time. Think about the telephone which was invented in the late 1800s; the value of the telephone network increased exponentially as more and more users bought and started using them. Fast forward, and today you find several multi-billion dollar business that rely on these effects to drive their massive advertising engines.
Platforms that generate network effects are massively powerful ecosystems which increase in value almost magically. At tryb, we’ve been pitched by dozens of founders and CEOs who claim that their products generate network effects. Unfortunately, most the time this is simply not true.
Network effects matter for businesses because they are simultaneously a barrier to exit for existing users of the platform and a barrier to entry for the competition. As a founder or an investor, it’s important to appreciate the mechanics and nuances of network effects that are particular to any business, in order to understand what questions to ask and what the corresponding business strategy should be.