Back in July, we wrote about network effects in marketplaces and social platforms and how they are critical to defensibility. In the post, we talked about the difference between direct and indirect network effects, and how they may or may not relate to virality. Since then, we have been further developing our investment thesis on social platforms and want to add more nuance to the discussion.
In our post, we defined network effects this way:
“When a new user/member is added to the network, it increases the value of the product or service to all other users.”
This definition (like many others we’ve read) mainly refers to the quantity of users: i.e. more is better. Most likely, this is because the concept of network effects originated in the commerce or software world where every new user brings the same amount of added value to the product or experience.
However, network effects work a little differently on social platforms – and the value of a network shouldn’t be measured just by size, but also by the types of users themselves. More specifically, you need to look at the underlying relationship between the new user and existing users, and/or the influence of the new user.
The qualities that matter vary by the dynamics of the social network. For example:
- When a close friend joins a messaging platform like WhatsApp or a private social network like Facebook, you get more value than when that same close friend joins a community like Reddit.
- On a public social network like Twitter, an active user with lots of influence (i.e. a celebrity) will be of more interest and drive more value for the entire user base than a lurker.
In addition, all strong social platforms experience a time of exponential value creation: when critical mass is reached, tremendous network value is unlocked. As we discuss the quality of connections within a network, we also need to review the concept of critical mass beyond sheer volume of users, and how its onset differs depending on the type of social platform.
Think about the following examples:
Communities like Reddit are fun (aka valuable) after reaching a critical mass. Here, the actual size of the network is most important and it matters less if there’s little to no relationship between participants. The challenge in reaching critical mass is that communities typically have much less mass appeal or applicability (the strongest communities are pretty niche).
For social networks, the number of users needed to reach critical mass is likely less than for communities. This is because the value of the network is tied to the number of meaningful connections made from underlying social graphs (i.e. your network of friends or colleagues) and/or the number of influencers on the platform. Note: we’re using “influencers” as an umbrella term for celebrities and great content creators without an existing brand.
For “private” platforms that use a friending model like Facebook, the “7 friends in 10 days” growth strategy illustrates how the value of the network grows first from a core group of users you care about. Then inevitably through the bigger network of networks, personal networks become less fragmented and social circles (school, work, family) overlap.
For “public” platforms that use a follow model like Twitter, influencers typically lead the exponential value creation mentioned above as they’re responsible for creating most of the content that is consumed.
For messaging, you can arguably reach critical mass with just two people who text a lot between each other. It’s probably true that the more utilitarian a platform is, the more important the quality of relationships between participants is than sheer numbers.
Our main takeaway: When building your social platform, don’t just think about increasing your user base in terms of raw numbers, but also consider the value and effect that particular users bring to the platform. Whether you target a core group of friends for private social networking, or a majority of a group if the underlying social graph is group-based, focus on user quality in order to leverage the inherent virality of social platforms to ultimately reach critical mass.