"The network is behind everything"

In 2017, when we built OkCredit, it was purely from the perspective of solving a pressing need for SMBs. Meeting startups and VCs over the years has enlightened me in several ways but something that has caught my interest is the concept of network effects. Out of curiosity, I have been reading and learning more about the subject.

At a very basic level, network effects are the core of human existence. Our personalities and choices are defined by the kind of networks we have.

Startups are not founded keeping network effects in mind. It wasn't the main inspiration for us to start OkCredit. Economic theories don't precede ideas. But network effects kick in when more and more users join a platform and as they do, they increase value for the existing user.

“Network effects are tricky and hard to describe but fundamentally turn on the following question: Can the marketplace provide a better experience to customer “n+1000” than it did to customer “n” directly as a function of adding 1000 more participants to the market? You can pose this question to either side of the network – demand or supply. If you have something like this in place it is magic, as you will get stronger over time not weaker”---- Bill Gurley.

Always remember that the focus is on value. As you sign up more customers, are you driving inherent value to your core users. It's also your most important moat. When value proposition weakens/stops, you lose competitive advantage as multi-tenanting starts to happen.

Network effect businesses have two defining characteristics, among many others. It's actually the balance that all startups need to have since early-stage maintaining both growth and retention.

While the fact that network effect is behind the success of Facebook and Amazon is widely known, let's look at how it applies to some of the Indian startups.

Take for example- Swiggy. The more customers Swiggy has, the more restaurant partners will come on its platform. Similarly, in the case of Unacademy- as more and more students use Unacademy, it becomes valuable to the teachers on the platform.

Today, the network effect applies to virtually every tech startup. So, the sphere is really large. I will be discussing some more aspects of network effects in another post. Credits to @JamesCurrier, @HarvardBiz, @anuhariharan and @a16z for all the knowledge on the subject.

P.S- Do share your thoughts on network effects, reading materials or any aspect that I should write about.

Harsh Pokharna (CEO & CoFounder, Okcredit)