why do venture capitalists invest in some products but not others?
TRANSCRIPT
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WHY DO VENTURE CAPITALISTS INVEST IN SOME PRODUCTS BUT NOT OTHERS?
BEN GILBERT
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I’M FORTUNATE.YOU’RE FORTUNATE.
WE ALL LIVE IN THE BEST TIME TO BE ALIVE FOR HUMANS.
EVER.
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AND WE GET TO BUILD STUFF!
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TODAY’S TALK IS ABOUT HOW TO MAKE THE MOST OF THAT, AND
BUILD THE BEST STUFF WE CAN.
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OKAY, BUT WHAT SPECIFICALLY?
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PRODUCT BUSINESS MODELS
THIS TALK
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STORY TIME
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NETWORK EFFECTS
MOATS
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NETWORK EFFECTS
MOATS
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NETWORK EFFECTS
MOATS
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NETWORK EFFECTS
MOATS
BrandPatents + Regulation
Supply-Side Economies of ScaleDemand-Side Economies of Scale
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NETWORK EFFECTS
MOATS
BrandPatents + Regulation
Supply-Side Economies of ScaleDemand-Side Economies of ScaleNetwork Effects
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PRODUCT
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PRODUCT USERUSER
USER
USER
USERUSER
USER
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PRODUCT
USER
USERUSER
USER
USER
USERUSER
USER
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SOME EXAMPLES OF NETWORK EFFECTS
COMMUNICATION & SOCIAL
NETWORKSMARKETPLACESECOSYSTEMSPLATFORMS
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WHERE DOES THEIR POWER COME FROM?
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PRODUCT
USER
USERUSER
USER
USER
USERUSER
USER
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PRODUCT
USER
USERUSER
USER
USER
USERUSER
USER
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(N) (N-1)VALUE =
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(N) (N-1)N2VALUE =
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Value
0
16
32
48
64
80
96
112
128
144
160
Cost
1 2 3 4 5 6 7 8 9 10 11 12
METCALFE’S LAW: N2
SARNOFF’S LAW: N
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USER
USERUSER
USER
USER
USERUSER
USER
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USER
USERUSER
USER
USER
USERUSER
USER
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USER
USERUSER
USER
USER
USERUSER
USER
USERUSER USERUSERUSERUSER
USER
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Value
0
16
32
48
64
80
96
112
128
144
160
Cost
1 2 3 4 5 6 7 8 9 10 11 12
METCALFE’S LAW: N2
SARNOFF’S LAW: N
ZIPF'S LAW: N*LOG(N)
http://spectrum.ieee.org/computing/networks/metcalfes-law-is-wrong
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Value
0
3
6
9
12
15
18
21
24
27
30
Cost
1 2 3 4 5 6 7 8 9 10 11 12
SARNOFF’S LAW: N
ZIPF'S LAW: N*LOG(N)
http://spectrum.ieee.org/computing/networks/metcalfes-law-is-wrong
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More Hosts = Greater Selection
Better Experience = Attracts More Travelers
MARKETPLACE
TRAVELERHOST
HOST
HOST
HOST
TRAVELER
TRAVELER
TRAVELERMore travelers = More Bookings
Better Experience = Attracts More Hosts
Cross-Side Network Effect
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MARKETPLACE
TRAVELERHOST
HOST
HOST
HOST
TRAVELER
TRAVELER
TRAVELER
Same-Side Network Effect
More Travelers = More Reviews More Trust = More Repeat + New Travelers
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MOATS
NETWORK EFFECTS
FLYWHEELS
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Source: Harvard Business Review
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STUDIO THEATRICAL
FILMS
DISNEYLAND
MERCHANDISE LICENSING
Provides Additional Sales Outlet
Plugs Park “Disneyland USA”
Source: Harvard Business Review
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STUDIO THEATRICAL
FILMS
DISNEYLAND
MERCHANDISE LICENSING
Exploits Films
Provides Additional Sales Outlet
Plugs Park “Disneyland USA”
Source: Harvard Business Review
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Source: Amazon
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“…today close to 50% of units sold on Amazon are sold by third-party sellers. Marketplace is great for customers because it adds unique selection, and it’s great for sellers… With Fulfillment By Amazon, that flywheel spins faster because sellers’ inventory becomes Prime-eligible – Prime becomes more valuable for members, and sellers sell more.”
- Jeff Bezos, 2015 letter to shareholders
“…today close to 50% of units sold on Amazon are sold by third-party sellers. Marketplace is great for customers because it adds unique selection, and it’s great for sellers… With Fulfillment By Amazon, that flywheel spins faster because sellers’ inventory becomes Prime-eligible – Prime becomes more valuable for members, and sellers sell more.”
- Jeff Bezos, 2015 letter to shareholders
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“…today close to 50% of units sold on Amazon are sold by third-party sellers. Marketplace is great for customers because it adds unique selection, and it’s great for sellers… With Fulfillment By Amazon, that flywheel spins faster because sellers’ inventory becomes Prime-eligible – Prime becomes more valuable for members, and sellers sell more.”
- Jeff Bezos, 2015 letter to shareholders
“…today close to 50% of units sold on Amazon are sold by third-party sellers. Marketplace is great for customers because it adds unique selection, and it’s great for sellers… With Fulfillment By Amazon, that flywheel spins faster because sellers’ inventory becomes Prime-eligible – Prime becomes more valuable for members, and sellers sell more.”
- Jeff Bezos, 2015 letter to shareholders
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NETWORK EFFECTS CREATE WINNER-TAKE-ALL DYNAMICS
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THE COLD START PROBLEM
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VALUE TO THE FIRST USER
POWERFUL LONG-TERM NETWORK EFFECTS
GOOD PLACE
TO START
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“COME FOR THE TOOL, STAY FOR THE NETWORK”
- Chris Dixon, Andreessen Horowitz
1
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BOOTSTRAP WITH A PRE-EXISTING TIGHT-KNIT GROUP
2
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ACQUIRE ONE SIDE OF THE MARKETPLACE IN BULK
3
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WHY IS THIS IMPORTANT TO US?
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PRODUCTS WITHOUT NETWORK EFFECTS DIE
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HOW CAN YOU STRENGTHEN THE NETWORK EFFECTS IN YOUR
BUSINESS?
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THANKS! TWITTER: @GILBERT
Credit: fdm2go.com