Network Effects
Akira the Don, Naval Ravikant
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Network effects, network effects Free leverage Network effects, network effects Network effects free leverage Network effects, network effects Network effects free leverage Bob Metcalfe, who created Ethernet Famously coined Metcalfe's Law Which is the value of a Network is proportional to the Square of the number of nodes in the network (Nodes in the network) (Nodes in the network) If a network of size 10 would Have a value of a hundred Network of a size hundred would Have a value of 10, 000 It's not just 10X more, it's 100X more So you want to be in A network effect business If you're number one in The network effect business You win everything One of the dirty secrets of Silicon Valley is that a lot of the winning Businesses are natural monopolies Network effects, network effects Network effects free leverage Network effects, network effects Network effects free leverage What is a network effect? Let's define it precisely A network effect is when each additional user Adds value to the existing user base So your users themselves are creating some Value for the existing users The classic example that I think Everybody can understand is language Let's say that there's a hundred People live in a community Speak 10 different languages and each person Just speaks one of those 10 You're having to translate all the time It's incredibly painful If all hundred of you Spoke the same language It would add tremendous value 10 people start off speaking 10 languages One extra person learns English Well, now all of a sudden 11 people Know English so that the next Person who comes in to learn new Language probably gonna choose English At some point, let's say English gets To 20 or 25 people, it's done It's just gonna own the entire Language marketplace and the Rest of the languages will get competed out Network effects, network effects Network effects free leverage Network effects, network effects Network effects free leverage The network effect is are Very powerful concept When you're picking a business model It's really good idea to pick A model where you can Benefit from network effects Low marginal costs, and scale Economies, and these tend to go together Like anything that has zero marginal cost Of production obviously has scale economies And things that have zero marginal cost Of reproductions very often tend To have network effects because it Doesn't cost you anything more To stamp out the thing so Then you can just create Little hooks for users to add Value to each other So you should always be thinking about How your user, your customers Add value to each other Because that is the ultimate form of leverage You're on the beach in the Bahamas or you're sleeping at Night and your customers are adding Value to each other Network effects, network effects Network effects free leverage Network effects, network effects Network effects free leverage Network effects, network effects Network effects free leverage Network effects, network effects Network effects free leverage
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