In this episode of the GrowthTLDR, we talk to James Currier, managing partner at NFX guild, serial entrepreneur, and the leading mind on network effects.
James and his partners exclusively invest in companies with network effects because those companies end up being a lot more profitable.
We talk to James about the most common types of network effects, how companies can add network effects to their business, and why the best companies think about building multi-channel games vs. single-player games.
Time Stamped Notes:
[2:20] - Network effects help make your business more defensible as each user who joins it, makes it more valuable for the other users who join. James and his team at NFX exclusively invest in companies with network effects.
[3:55] - 70% of the value created in tech has come from companies with network effects at their core.
[6:05] - There are examples of companies that have added network effects to their business model, for example, Salesforce who've added force.com.
[6:50] - Companies like Oracle and Salesforce have built defensibility through being deeply embedded in a business's operations.
[7:30] - We talk about the difference in companies' values who've mastered network effects vs. being embedded in a business's operations.
[12:00] - A lot of people get viral, and network effects mixed up. Virality means your users help you get other users for free, but it doesn't provide you with any defensibility like network effects. James and his team published a map to show the different kinds of network effects, and stack ranked them by their effectiveness.
[15:00] - James talks about the importance of companies thinking through how they can build multi-player businesses vs. single player. For example, the company AI Dungeon allowed people to play dungeons and dragons. The company added an option to enable you to play it with friends, change from a single player to a multi-player, and grow much faster.
[16:50] - It's dangerous to build your business on another platform. You benefit from that platform's reach, but it can be challenging to move your business of that platform.
[19:25] - James talks about his experience helping to build Meerkat, and how Twitter shut them down, killing the business.
[21:45] - Network effects don't mean there is only one winner in that market/industry. There are examples of where companies built large businesses in sub-sectors of an industry that already had a company with successful network effects.
[25:00] - We talk about how large companies with strong network effects like Facebook can kill competitors by copying their products and launching them to their audience.
[27:15] - A big part of James and his partner's strategy is adding value through the content they publish and tools like Signal, which helps you find VCs, and TheCompanyBrief, which helps founders raise funds.
[31:50] - Some of the characteristics of companies James doesn't end up investing in are - they haven't nailed their positioning, the product doesn't entirely fulfill its promise, and the struggle to get liquidity into their marketplace.
[34:15] - James recommends the book - 'Positioning' by James Trout. A great lesson from the book is to find the thing you can be number one in and position yourself as being great at that thing.