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One of the things we look for in Founders we invest in is a deep understanding of networks & network effects (nfx). In the internet age, this is such an advantage that we made it a core part of our investing thesis. It's why we're called NFX @nfxguild.
Companies with network effects are the most highly valued because they produce increasing returns. But it's not easy to get network effects going. Today I want to share 19 of the top resources for understanding & building networks and defensibility.
1. First up is psychologist Stanley Milgram's study on the "small-world" phenomenon from 1967. This study showed empirically that any 2 people in the US have a surprisingly few degrees of separation (a median of 6). Empirically speaking, it's a small world snap.stanford.edu/class/cs224w-r…
2. One reason for this small world phenomenon is the existence of bridges - connections that span across networks clusters or cliques. In the most cited sociology article ever written, "The Strength of Weak Ties", Mark Grenovetter shows that these "bridges" tend to be weak ties
Grenovetter: "The stronger the tie between A and B, the larger the proportion of individuals to whom they will both be tied". Strong connections tend to form between people who share many connections. cs.umd.edu/~golbeck/INST6…
3. Network structure matters. James Coleman shows in "Social Capital in the Creation of Human Capital" that the structure of a network can determine the behavior of its participants. Important for networked product builders to realize this faculty.washington.edu/matsueda/cours…
4. Power laws apply to network degree distribution, which means there's a tendency for highly-connected nodes to get even more well-connected in real-world networks. This 1999 paper by @barabasi & Albert explains why "rich" nodes tend to get richer barabasi.com/f/67.pdf
5. Network science isn't just for academics. Big companies like Facebook understand the value, and one of Facebook's mission statements was to make the world more "connected.".
As it turned out, that mission was measurable. Using Stanley Milgram's method to measure the average degrees of separation between any two Facebook users, Facebook found an average of 3.57 degrees of separation between its then 1.59 billion users. research.fb.com/three-and-a-ha…
6. "The Square and the Tower" by historian @nfergus is a fascinating book about networks throughout history. Chapters 5 through 8 cover network science in a way that's really accessible. I reccommend giving it a read amazon.com/Square-Tower-N…
7. In the @HarvardBiz classic "Increasing Returns and the New World of Business", W. Brian Arthur explains the emergence of a new type of "increasing returns" economics powered by network effects. He calls this new economy the "Casino of Technology"hbr.org/1996/07/increa…
8. In a must-read essay written by @BobMetcalfe, the creator of the ethernet and inventor of Metcalfe's Law revisits his network effects formula, V~N^2, 40 years later. Interestingly, he uses Facebook user growth to prove his point ieeexplore.ieee.org/document/66363…
9. Moving to some of the more practical resources, in "Data Network Effects in SaaS Enabled Marketplaces", @redpointvc investor @ttunguz describes four key advantages of software-enabled marketplaces that let them take advantage of data network effects. tomtunguz.com/saas-enabled-m…
10. This wide-ranging network effects discussion between myself and @anuhariharan on the @a16z podcast is a pretty good primer on network effects for those who prefer audio content a16z.com/2016/08/01/net…
11. In "Strategies for Two-Sided Markets", @InfoEcon, @g2parker, and @teisenmann navigate the complexity of multi-sidedness. Useful framework for Founders looking to tackle supply and demand-side dynamics. hbr.org/2006/10/strate…
12. A roundup of "required reading for marketplace startups" from marketplace expert @andrewchen, this is an invaluable resource for marketplace startups andrewchen.co/marketplace-st…
13. @WarrenBuffett's famous "Economics of the Moat and the Castle" is a 1995 conversation where he coins the term "economic moats", or defensibilities. Buffet sees defensibility as the fundamental secret to a company's success buffett.cnbc.com/video/1995/05/…
14. Another HBR entry by economist @michaeleporter, "How Competitive Forces Shape Strategy" was a hugely influential essay that popularized the "Five Forces Model". Includes a good discussion of brand and scale defensibilities hbr.org/1979/03/how-co…
15. In "All Revenue is Not Created Equal", @benchmark VC @bgurley discusses the factors that contribute to how companies are valued, including network effects, embedding, and scale abovethecrowd.com/2011/05/24/all…
16. In this post, VC @fredwilson tells a fictional story to show how lethal it is not to have a defensibility strategy. Great, short read that brings the point home in a powerful way avc.com/2014/07/the-de…
17. @stratechery's @benthompson is well known in the startup world for his insightful analysis on big tech companies. This post by him is a good case study in the power of scale effects as they apply to Amazon stratechery.com/2018/amazon-go…
18. Here, @a16z investor @benedictevans delves into how scale has allowed tech giants like Google, Facebook, Amazon, and Apple to build secondary competitive advantages and to "disrupt themselves", making their defensibility really formidable ben-evans.com/benedictevans/…
19: Finally, we have @Matt_Heiman writing for @GreylockVC on how to build defensibility for non-networked products, a necessary strategy if you can't get genuine network effects going news.greylock.com/beyond-network…
Earlier this year I published the NFX Archives, with summaries and notes from all 19 resources above, plus an additional 12. Read it here: nfx.com/post/network-e…
