Max Brun breaks down network effects into four categories: data networks, interaction networks, marketplaces, and platforms. He explains how each type scales differently and what makes them defensible, plus how SaaS overlays blur the lines between them.
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I thought it might be great if you could maybe kind of give us like an overview or kind of maybe like network effects 101. The definition I think everyone knows, right? The addition of a user makes the product more valuable for all users. So essentially the utility of your product is tied into adoption, which is both good and bad. Good because when you get that going, that can be very, very powerful. Bad because on day zero, you don't really have anything. You need to find a way to kickstart your product. There's lots of different ways to categorize network effects. Like, NFX has their own, I have my own. The way I divide them is into 4 very broad buckets. Data networks where you're collecting data from users to increase the value of the product for the same users. So, Waze or TripAdvisor would be in that bucket. An interaction network where you're connecting users to enable ongoing information exchange between them. There you could have social networks, collaboration, P2P payments, stuff like that. There's marketplaces, which we all know you're connecting buyers and sellers to enable transactions, Airbnb, Uber, stuff like that. And there's what I define platform, which is not sort of the bastardized term we use in the tech world. It's when you're allowing application developers to build applications on top of your product and then connect them to the users of your product. That's an actual platform. And you could have some sort of SaaS overlay between those 2 middle 2 categories. And you kind of think of this as a spectrum going from data network all the way to platform where adjacent categories tend to have some overlaps. And then I have subcategories within those depending, there's certain characteristics that make those types of network effects more defensible, more scalable or less. That's how I end up sort of categorizing them. So they tend to be, the framework tends to be a bit more flexible and a bit more applicable. Compared to a lot of other frameworks that you see out there, which sort of look good in theory, but can be very, very hard to apply in sort of complex, messy reality.
