Early-stage founders often confuse virality with network effects. Zoom spreading through sharing isn't a network effect because the product doesn't get better as more people use it. Real marketplaces like Airbnb create defensibility by connecting buyers and sellers, but asset rental companies like Lime aren't marketplaces at all.
Chapters
Are there any common misconceptions maybe with early-stage founders that you're seeing specifically around network effects and maybe some of the related kind of topics as far as like defensibility when it comes to pitching?
I mean, there's a few. There's 2 very common ones. One is confusing virality with network effects, which is the idea of virality, in particular product virality, is that users spread the word about the product in process of using it. So Zoom, for example, has virality, right? You want to use Zoom, you've got to share a link with The other person who wants to join the call, they don't need to have a Zoom account. And because they don't need to have a Zoom account, adding more Zoom account holders does not increase the value of the product. The value of the product is the same. And so Zoom does not have any defensibility from network effects. And so as of today, there's quite a few Zoom alternatives. And Hopin was kind of one of those companies that had a similar experience, right? It was touted as a network effect product. It really was not. It was purely viral. events product and we know kind of what happened with that. The second one is that anything that looks like commerce is somewhat equated with marketplaces, right? There's a rule, the idea of a marketplace that enables an interaction between a buyer and a seller. If the company is the seller, then you are not a marketplace, you are an e-commerce company. There's not a dramatic difference between the business model of a a Lime or a Bird and a Hertz. They're like asset rental companies. The same thing for all these 10-minute grocery delivery companies. There's not a huge business model difference between a Gorillas and a Tesco outside of the fact that Gorillas just decided they wanted to burn more money. So fundamentally these things look like marketplaces, but they're not. And the thing about defensibility off network effects, even when you do the spectrum there, So that I can— you can sort of excuse lots of founders and investors at the level of nuance that most have not been exposed to. That's okay. But these 2 are the ones that really, really matter because it's pretty binary if you have a network effect or not in those cases. And if you invest in a company or raise funds in a company that you think has network effect but actually doesn't, that's a pretty bad thing. That's not going to end well.
