Achieving The Network Effect: Solving The Chicken or The Egg

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One of the most defensible positions for a startup is if you can achieve the network effect. The network effect is so strong that it has kept large companies in business for a long time, despite bad products and numerous competitors. Craigslist is a perfect example. It is only recently that a new wave of startups like AirBNB, TaskRabbit, and RentJuice have started to chip away at the Craigslist stronghold, but it took over 10 years.  

The network effect has also defended companies like Facebook from an onslaught of competitor attempts. I remember in the early days of Facebook that almost every campus had at least a few local startups that tried to over take it, but once Facebook took a stronghold in a campus, it was impossible to unseat it.  Facebook also faced competition from numerous international players, yet the only areas that have seemed to hold ground are Russia and parts of Asia.  

Achieving the network effect is no easy feat. It comes with a huge hurdle: The chicken or the egg problem.   

Two Versions of Chicken or The Egg

There are two versions of the chicken or the egg problem that warrant important distinctions because each have a different solution.

Type #1: Platforms/Marketplaces – Chicken or the egg version #1 is when your product connects two different types of groups. Most people who call themselves platforms or marketplaces fit in this category. Think eBay connecting buyers and sellers of goods or AirBNB connecting home/apt owners with vacation renters.  My last company, Viximo, was in this category.  We connected social games with social networks.    

In this case, the value to each group of users is dependent on the use of the other group. No renters would use AirBNB if no home/apt owners were listing on the site, just as no home/apt owners would use the site if no renters were coming to it.  

Type #2: Communities/Social Networks - The second version of the chicken or the egg is when your product connects people of similar type to create broader value. Online communities and social networks such as LinkedIn, Facebook, and Match.com are examples.  The value to each individual user grows the more users in the overall community.

When a community or social network is in its infancy, there is a huge chicken or the egg problem. With a small number of people on the platform, the value to each individual user is small, so how do you get more users to join?

Solving Platforms and Marketplace Issues

To solve version one of the chicken or the egg problem, create value for one group of users that is not dependent on the other group of users.  With Viximo, we internally created and licensed our own apps and games.  With a couple apps/games it allowed us to offer value to our first few distribution partners without depending on signing third party game developers.  Once we had the first few distribution partners we were then able to sign our first third party game developers. We eventually killed the apps/games we built internally once we had the network going, but the point is at the beginning we manually created value for one group of customers. 

Another great example is Craiglist. Craig Newmark (founder of Craigslist) curated his own set of events that he thought people would be interested in and emailed them out to friends. Eventually his distribution list grew large enough that others started submitting their own events and items and the network became self-sustaining. Users would likely have not submitted their own items, if Craig had not built the initial distribution list by manually submitting items himself. 

In other words, you have to be an app before you can be a platform (or marketplace).

Solving For Communities and Social Network Issues

In communities and social networks the value to each individual user comes from the density of the network. Would you use Facebook if the majority of your friends weren’t on it? Would you use LinkedIn if the majority of the professionals you meet weren’t using it? Probably not.  

So how do you get network density in the earliest stages? Decrease the size of your target audience in order to make it easier to get density. The best example of this is Facebook’s launch. Rather than opening to all college students at once, Facebook was restricted to just Harvard’s campus. Getting network density among an audience of 6500 (Harvard’s undergrad student population) is exponentially easier than getting network density among an audience of 20 Million (US college student population). LinkedIN successfully decreased target audience to get network density by focusing initially on the professional audience solely in Silicon Valley.  

A target audience for a community is most commonly decreased by geography, but there are different ways to slice it.  One of my investments, GrabCad, has focused their audience on a single profession, mechanical engineers. MySpace found its early traction by focusing their target audience to the music industry.  The online dating industry has probably sliced it every way you can imagine. One can find dating sites for all different races and religions, “big and beautiful,” and even those that enjoy a cougar or sugar daddy every now and then.  

Don’t Be Afraid Of Brute Force

In today’s startup environment where the “product is everything” mantra is pervasive, many entrepreneurs get discouraged when they build it, and the users don’t flock naturally. Peter Thiel put it best: 

"They [Entrepreneurs] tend to overlook it [distribution]…Even if you have an incredibly fantastic product, you still have to get it out to people.  The engineering bias blinds people to this simple fact. The conventional thinking is that great products sell themselves; if you have great product, it will inevitably reach consumers. But nothing is further from the truth."

No matter which chicken or the egg problem you are solving for, don’t be afraid of brute force. Some companies get adoption naturally, but more often there is someone behind the scenes pulling strings. Yelp paid reviewers in the early days while Myspace spammed the hell out of an email list from an earlier company. At Viximo we paid out guarantees to our earliest partners. 

The point is, solving the chicken or the egg problem is extremely tough.  Avoid the common mistakes of user acquisition and have a plan that involves brute force. If you want to reach the network effect don’t leave it to luck, make it happen yourself.  

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