Tag / network effect

CurseEthan Stock lived the Silicon Valley dream. He had recently sold his company to eBay and emanated the tanned skin and relaxed composure you’d expect of someone who just cashed a big corporate check. But as we sat across from one another in a Palo Alto coffee shop, I was surprised by what he said next. “Mediocrity is worse than failure, you know?” For seven years before the acquisition, Stock served as the founding CEO of Zvents, an online guide for local events. Though he was successful by anyone’s standards, I could tell he was a guy who, like me, had learned some hard lessons.

A Checklist for Online Disruption

On November 13, 2012, Bill Gurley, a partner at Benchmark Capital, posted a remarkable essay on his blog. In it, he described the, “10 factors to consider when evaluating digital marketplaces.” Given the tremendous value marketplaces create and how hard they are to get right, I found this essay to be a goldmine of insight.

I teamed-up with my friend and blogger Sangeet Paul Choudary, to digest Bill’s post into a more memorable format. The result is this brief checklist we hope will help take some of the luck out of evaluating marketplace businesses.

As Bill wrote, “It is unlikely that you will find a marketplace opportunity that would score ten out of ten with respect to this list.” But according to Bill, the odds of success improve the more of these characteristics the business exhibits.

Note: I’m pleased to have co-authored this post with Sangeet Paul Choudary, who analyzes business models for network businesses at Platformed.info. Follow Sangeet on Twitter at @sanguit.

If there is one altar at which Silicon Valley worships, it is the shrine of the holy network effect. Its mystical powers pluck lone startups from obscurity and elevate them to fame and fortune. The list of anointed ones includes nearly every technology success story of the past 15 years. Apple, Facebook, Microsoft, eBay, and PayPal, have each soared to multi-billion-dollar valuations on the supreme power of the network effect.

But today, the power of the network effect is fading, at least in its current incarnation. Traditionally defined as a system where each new user on the network increases the value of the service for all others, a network effect often creates a winner-takes-all dynamic, ordaining one dominant company above the rest. Moreover, these companies often wield monopoly-like powers over their industries.