why do venture capitalists invest in some products but not others?
TRANSCRIPT
WHY DO VENTURE CAPITALISTS INVEST IN SOME PRODUCTS BUT NOT OTHERS?
BEN GILBERT
I’M FORTUNATE.YOU’RE FORTUNATE.
WE ALL LIVE IN THE BEST TIME TO BE ALIVE FOR HUMANS.
EVER.
AND WE GET TO BUILD STUFF!
TODAY’S TALK IS ABOUT HOW TO MAKE THE MOST OF THAT, AND
BUILD THE BEST STUFF WE CAN.
OKAY, BUT WHAT SPECIFICALLY?
PRODUCT BUSINESS MODELS
THIS TALK
STORY TIME
NETWORK EFFECTS
MOATS
NETWORK EFFECTS
MOATS
NETWORK EFFECTS
MOATS
NETWORK EFFECTS
MOATS
BrandPatents + Regulation
Supply-Side Economies of ScaleDemand-Side Economies of Scale
NETWORK EFFECTS
MOATS
BrandPatents + Regulation
Supply-Side Economies of ScaleDemand-Side Economies of ScaleNetwork Effects
PRODUCT
PRODUCT USERUSER
USER
USER
USERUSER
USER
PRODUCT
USER
USERUSER
USER
USER
USERUSER
USER
SOME EXAMPLES OF NETWORK EFFECTS
COMMUNICATION & SOCIAL
NETWORKSMARKETPLACESECOSYSTEMSPLATFORMS
WHERE DOES THEIR POWER COME FROM?
PRODUCT
USER
USERUSER
USER
USER
USERUSER
USER
PRODUCT
USER
USERUSER
USER
USER
USERUSER
USER
(N) (N-1)VALUE =
(N) (N-1)N2VALUE =
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
USER
USERUSER
USER
USER
USERUSER
USER
USER
USERUSER
USER
USER
USERUSER
USER
USER
USERUSER
USER
USER
USERUSER
USER
USERUSER USERUSERUSERUSER
USER
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
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
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
MARKETPLACE
TRAVELERHOST
HOST
HOST
HOST
TRAVELER
TRAVELER
TRAVELER
Same-Side Network Effect
More Travelers = More Reviews More Trust = More Repeat + New Travelers
MOATS
NETWORK EFFECTS
FLYWHEELS
Source: Harvard Business Review
STUDIO THEATRICAL
FILMS
DISNEYLAND
MERCHANDISE LICENSING
Provides Additional Sales Outlet
Plugs Park “Disneyland USA”
Source: Harvard Business Review
STUDIO THEATRICAL
FILMS
DISNEYLAND
MERCHANDISE LICENSING
Exploits Films
Provides Additional Sales Outlet
Plugs Park “Disneyland USA”
Source: Harvard Business Review
Source: Amazon
“…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
“…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
NETWORK EFFECTS CREATE WINNER-TAKE-ALL DYNAMICS
THE COLD START PROBLEM
VALUE TO THE FIRST USER
POWERFUL LONG-TERM NETWORK EFFECTS
GOOD PLACE
TO START
“COME FOR THE TOOL, STAY FOR THE NETWORK”
- Chris Dixon, Andreessen Horowitz
1
BOOTSTRAP WITH A PRE-EXISTING TIGHT-KNIT GROUP
2
ACQUIRE ONE SIDE OF THE MARKETPLACE IN BULK
3
WHY IS THIS IMPORTANT TO US?
PRODUCTS WITHOUT NETWORK EFFECTS DIE
HOW CAN YOU STRENGTHEN THE NETWORK EFFECTS IN YOUR
BUSINESS?
THANKS! TWITTER: @GILBERT
Credit: fdm2go.com