Network Effects - Akira the Don, Naval Ravikant

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