Hidden Networks: Uncovering the Power of Network Effects

Hidden Networks: Uncovering the Power of Network Effects

In the world of startups and businesses, network effects play a crucial role in determining the success and sustainability of a company. However, not all network effects are immediately apparent or easily recognizable. Some of the strongest network effects are hidden, and it is these hidden networks that often hold significant advantages for founders and investors.

One common characteristic of hidden networks is their slow growth. These networks take time to develop and reveal their true value. For example, Lambda School, an online coding bootcamp, operates on a slow network. It takes years for the true value of the Lambda network to become apparent as more students join and connect with employers and alumni. Slow networks, once established, are difficult to displace. Just like the top universities that took hundreds of years to build their networks, these slow networks continue to thrive despite periodic predictions of their demise.

Another type of hidden network is the unfinished network. These networks are temporarily incomplete due to a product feature or strategic decision. However, once the network is completed, the network effects become immediately clear. OpenTable, a popular restaurant reservation platform, provides an example of an unfinished network. As they built up a significant number of restaurants, they created an opportunity to be the easiest place for diners to discover restaurants. Once enough restaurants were onboarded, the network effects kicked in, attracting more diners and creating a virtuous cycle. The challenge with unfinished networks is that not all of them get completed, and it is essential to understand the difficulty of completing the network, especially if the supply side is involved.

Throttled networks are another type of hidden network, where a product feature or strategic decision limits the size or engagement of the network. In the short run, these networks may appear to have weak or non-existent network effects. However, as the constraints are relaxed, the true strength of the network effects is revealed. Chief, a private network for women in leadership roles, is an example of a throttled network. While their network effects may not be apparent initially, as they unlock more opportunities for engagement and expand their membership pool, the value of their network will become evident. On the other hand, networks that rely on exclusivity, such as dating apps or members-only clubs, often have an upper limit to their network effects.

Lastly, there are latent networks, also known as "Come for the network, stay for the tool" networks. These networks are built before the actual product or tool is introduced. The idea is to create a community that acts like a network, with users interacting and creating value for each other. Eventually, a product is launched that amplifies the network's engagement. Gaming companies have successfully utilized this strategy, setting up community platforms like Discord before launching their games. These latent networks are the most challenging to predict and execute, as they require a vibrant ecosystem and engaged users.

In conclusion, hidden networks offer unique advantages for startups and businesses. While they may require more patience and resources, they have the potential for long-term success and sustainability. To leverage hidden networks effectively, here are three actionable pieces of advice:

1. Identify slow networks: Look for networks with long product loops or insufficient saturation. These networks have the potential for strong network effects once the value becomes apparent. Patience and resources are crucial for building slow networks.

2. Assess unfinished networks: Understand the completeness of the network and the difficulty of completing it. If there is emergent behavior on the incomplete side of the network, it might be an unfinished network with hidden network effects waiting to be unlocked.

3. Evaluate throttled networks: Examine the constraints that limit the size or engagement of the network. Determine what would happen if these constraints were relaxed. If the network shows potential for growth and increased engagement, it might be a throttled network with untapped network effects.

Hidden networks are often hidden advantages, and they should be considered by founders, investors, and employees alike. By recognizing and harnessing the power of hidden network effects, companies can build efficient, sustainable, and defensible networks that drive long-term success.