a16z Podcast | Getting Network Effects

1. 0:00 – 3:09

   Defining Network Effects and Why They Matter

   1. SCSonal Chokshi0:00

      Hi, everyone. Welcome to the a16z Podcast. I'm Sonal, and today's episode is all about network effects, and it's based on an event we did that was itself based on a set of slides that we released that you can find online at bit.ly/networkeffectsa16z. Welcome to our Network Effects event. Before we get started, let me actually just quickly introduce our guests, who you probably know 'cause you came here knowing who they are, but just to quickly tell you about who they are. Anu is an electrical engineer by training. She used to work at Qualcomm, where she built the video streaming solution there, and then later she worked at BCG, and she's now a partner in our deal and investing team, and she covers all things marketplaces with Jeff. Jeff's a general partner here. He was previously the CEO at OpenTable, which is why the network effects theme is particularly strong here, and president at PayPal, and STP at eBay before that. And his board seats include a lot of our companies that have network effects, like Airbnb and many more. It's actually funny because this whole deck started off as the result of an internal debate, and, you know, we're pretty opinionated as a culture, and there's a lot of strong opinions floating around.

   2. JJJeff Jordan1:04

      Yep.

   3. SCSonal Chokshi1:05

      But I think it's kind of funny, 'cause this is probably one of the most internal contentious-

   4. JJJeff Jordan1:09

      Mm-hmm

   5. SCSonal Chokshi1:09

      ... debates we've had around what is a network effect? And I think it's because it's one of those concepts that's really easy to learn but difficult to master. So on that note, let's just start off by defining what's a network effect.

   6. AHAnu Hariharan1:21

      Yeah. Simply put, I think, uh, the simple definition is, as more users join the platform, it's more valuable to existing users. Um, so it's really as simple as that, right? And it actually started with hardware. So think of the telephone in the early 1900s. The more people that had telephone, you could actually make a phone call. So there was a network effect if more people... It was valuable to you because if more people had telephone, you could reach more people. So it sounds very simple at the onset, but I think the biggest misconception people have, in fact, we internally have debated about is, you know, growth versus network effect. So, you know, growth is different because in... especially as a s- as a startup in your early days, you're growing really fast. That's growth. But network effect is really value. How valuable is your service to the users as more users join the platform?

   7. SCSonal Chokshi2:09

      So to be clear, though, it's growth and value. But what's the difference between that value and engagement? Is it enough to just say, "We've got a lot of engagement, and therefore we have a network effect"? How do you actually know there is a network effect?

   8. JJJeff Jordan2:21

      I mean, we, we brawl over this concept because, uh, the easy observation is businesses with network effects typically are very defensible and often are prone to monopoly. You know, and we're t- trying to get in early in the company, so that's not completely apparent when we're investing. So, you know, you're brough- you know, we'll have people standing on the table, "There's a network effect. Here's why. And no, there's not, and here's why." And so, I mean, it is one of the key drivers of, uh, the investment decision on a whole bunch of our consumer-side businesses and some of the business-side businesses. Ne- I mean, we actually told... uh, put a slide up to our ops last year, network effects equals moats. And, you know, the... if you, if you can achieve it, you're defensible. You're less susceptible to price pressure. You're less susceptible to pressure of, uh, you know, consumer acquisition economics and things like that 'cause if your service is more valuable than the other, you're gonna create that value, um, through, throughout the entire process.

2. 3:09 – 5:48

   Viral Growth vs. Network Effect: Facebook's Retention

   1. SCSonal Chokshi3:09

      Right. And it's... I mean, I think it's valuable for users, which is really key, but that is actually where I think we get tripped up on what a network effect-

   2. AHAnu Hariharan3:15

      Yeah

   3. SCSonal Chokshi3:15

      ... really is internally because I think we sometimes confuse, oh my God, the product has viral growth. Is that a network effect?

   4. AHAnu Hariharan3:21

      Mm-hmm.

   5. SCSonal Chokshi3:21

      How do you tease those apart?

   6. AHAnu Hariharan3:22

      Yeah, and I think that, uh, it's, it's hard to do it, especially when you're a hypergrowth startup, which is why, you know, we have our own internal debates, you know, whether the company has network effect or not. I think, uh, viral growth is speed of adoption. Think of speed as viral growth, and usually if you have viral growth, it sort of implies that you're not spending anything in customer acquisition costs, right? So Facebook is a great example. For the longest time, even to this day, they hardly spend money on acquiring users, right? And especially in the initial years, they spent zero dollars. It was growing virally. So how do you actually decipher whether Facebook has a network effect? It's because their MAUs and DAUs were growing quite fast. And they-

   7. SCSonal Chokshi4:02

      By MAUs you mean the monthly active users and the-

   8. AHAnu Hariharan4:03

      Monthly actives and the daily actives

   9. SCSonal Chokshi4:05

      ... daily actives.

   10. AHAnu Hariharan4:05

       But the one metric, and Mark Zuckerberg has done a great job of saying this in so many interviews. The one metric that he really focused on in the first two years was retention, and the way he measured retention was daily actives by monthly actives. And if you see their chart in the first 18 months, it kept going from 52% to 55% to 57%. That showed that people really stayed in the network. That was a measure of the network effect and not just the viral growth in their users.

   11. JJJeff Jordan4:34

       And, and by the way, just think about the level of that number. I was talking to Mark in 2006. He, he reached out and he asked to get together, and we were chatting about, uh, business. And, um, and he got a text at the time, dinged his... and he reads it, and he smiles. I go, "What, what made you smile?" And he goes, "Oh, this is... We get our daily metrics via text." I go, "What metric?" And he goes, um, "It was this metric." He goes, "How many of our cumulative historic users do you think were active yesterday?" And I'm like, I'm, uh, just came out of eBay and PayPal. I'm like, "2, 3%, maybe." I, I think I got bold and, you know, "6%." And he goes, "53." And, you know, 53% of everyone who had ever signed up for the service was active the day before. And, and that, by the way, has only grown. As, you know, the, their installed base age, it gets bigger and ages, that number's grown. And you're just kinda like, "Okay, that's a network effect." [laughs]

   12. SCSonal Chokshi5:25

       Mm-hmm. I mean, I think the thing that's most interesting about this whole discussion is it's not by accident, but it feels like it's by accident, 'cause you hear these narratives, you know, like, oh my God, Facebook reached this number, and it was taking off at campuses everywhere. And in reality, it's something people actually work at, and I think people here wanna hear about how, because, I mean, what are some of the things that people do? Like, how do they start? I mean, Facebook's a unique case.

   13. AHAnu Hariharan5:48

       Mm-hmm.

3. 5:48 – 9:04

   Bootstrapping: Facebook's Clustered Launch and Growth Hacks

   1. SCSonal Chokshi5:48

      Maybe, and we can start with Facebook-

   2. AHAnu Hariharan5:49

      Yeah

   3. SCSonal Chokshi5:49

      ... and have other examples, but what are some of the things that people do to get to that network before there's an effect?

   4. AHAnu Hariharan5:54

      Yeah. I think the, the first question you wanna ask is, if you have a product, is how do you bootstrap? What are some of the early growth hacks that you wanna do to build the user base? And then the second step is you're sort of testing your product market fit as you grow the users, and then what you have to quickly hone on, what is the aha moment that gets the user back to continue to use my product, which actually drives the network effect. And so in Facebook's case, contrary to, you know, what most people think, they actually went in a very clustered approach. So they're, the first was they first launched in Harvard, and you could argue that they could easily expand to all the schools, right? But I think their goal was they needed to get at least 80% of Harvard signed up on Facebook and sort of have that high bar of 50%-plus engagement. So daily, they wanted more than 50% to come back daily, which is a very stretched goal, and in fact, if you go back to some of the early investors, one of the criticism of Facebook was, "Well, you didn't grow fast enough." I mean, it's a different story that they did penetrate almost 80% of the colleges in 18 months and had a high retention. But they did it in a very strategic way. Until they hit that high bar on Harvard, they did not roll it out to Stanford. And w- the discipline that they got as a result where they were tweaking the product to get the right fit. So simple things like the relationship status, they realized actually drove engagement really high, uh, because people felt uncomfortable asking someone else, like, "What is your relationship status?" While you could go to Facebook and figure that out. Uh, second thing that they did was they realized that if someone was connected to 10 friends in 14 days, they were much likely to return to Facebook. Uh, when they realized that, they started wor- you know, every new user that they joined, they worked on making sure that they got to 10 friends within 14 days.

   5. JJJeff Jordan7:43

      They would actually bludgeon the crap out of you to get you to 10 friends. It would be like you'd show up and, like, "Do you know these 12 people that..."

   6. AHAnu Hariharan7:50

      Yeah.

   7. JJJeff Jordan7:50

      So one of the best hacks Mark had was, um, he, he, it was well known, he got in trouble for it, he hacked the, the directories in each of the houses.

   8. AHAnu Hariharan7:57

      Mm-hmm.

   9. JJJeff Jordan7:57

      And so he pre-populated everyone on the Harvard campus into Facebook, and then let people claim their identities, but you could f- then friend... It was populated when the first person showed up. It might not have had the same utility-

   10. AHAnu Hariharan8:09

       Yeah

   11. JJJeff Jordan8:09

       ... but it was populated, versus being the first person to show up, it's like, you know, I, I'm in a stadium by myself. And so, I mean, I think he did end up in front of the president of the university for that hack, but the hack populated it-

   12. AHAnu Hariharan8:21

       Yeah, yeah

   13. JJJeff Jordan8:21

       ... and they, you know, brought a bunch of utility.

   14. AHAnu Hariharan8:23

       Yes.

   15. JJJeff Jordan8:23

       And so you would use the word growth hack. Virtually every marketplace we can think of did some, had some hack or hacks that enabled them to solve the-

   16. AHAnu Hariharan8:33

       Mm-hmm

   17. JJJeff Jordan8:33

       ... impossible chicken and egg problem. The chicken and egg problem is, okay, at OpenTable, it's only useful to restaurants if consumers are there, and it's only useful to consumers if restaurants were there. Where do you start? And so, you know, there's a whole bunch of different hacks that different, uh, entrepreneurs have used to try to address that. How do you get the flywheel spinning?

   18. AHAnu Hariharan8:52

       Yeah. Well, what are some of the other ways that you've seen people stumble on this? Because sometimes people discover the hack by accident, or is it deliberate? I mean, how do they really... I mean, do you actually wake up one day and say, "Okay, I'm gonna figure out the hack for this marketplace"?

   19. JJJeff Jordan9:03

       Yeah. Oh, yes. You do.

   20. AHAnu Hariharan9:03

       Is that what

4. 9:04 – 11:10

   OpenTable: Come for the Tool, Stay for the Network

   1. AHAnu Hariharan9:04

      you... [laughs]

   2. JJJeff Jordan9:04

      No, no, you, you... When we're talking to entrepreneurs, you're looking for the theory.

   3. AHAnu Hariharan9:07

      Yeah.

   4. JJJeff Jordan9:07

      What's your theory on how you're gonna bootstrap? You h- how are you gonna get-

   5. AHAnu Hariharan9:09

      Yeah

   6. JJJeff Jordan9:09

      ... the flywheel spinning? How are you gonna solve the chicken and the egg problem? Which side are you gonna start on? So OpenTable ended up starting completely on the restaurant side, because there was zero utility to the consumer until you had a selection of restaurants.

   7. AHAnu Hariharan9:21

      Of restaurants.

   8. JJJeff Jordan9:22

      And so how do you get a restaurant to adopt it when no consumers are using it? So you, in OpenTable's case is what Chris Dixon, you know, come for the tool, stay for the network. They build a suite of tools that they charge $200 for and laboriously rolled out one restaurant at a time, uh, throughout, you know, the country, that had enough utility that a restaurant was saying, "Okay, I'll adopt that in the absence of a network." And as they slowly built that base of restaurants, and I mean slowly.

   9. AHAnu Hariharan9:49

      Mm-hmm.

   10. JJJeff Jordan9:49

       I mean, they, they, a good salesperson would do three or four new restaurants a month.

   11. AHAnu Hariharan9:53

       Mm.

   12. JJJeff Jordan9:53

       And, you know, there's, you know, and there's 2,000 restaurants in San Francisco. That is slow. Um, and then, uh, at, there was a point where there was enough restaurants on the system. It was a subset of the restaurants in the system, but the utility of making an online order was so great that they'd say, "I, I ignore the fact that you don't have 80% of restaurants, because the 20% you do have has a huge amount of utility." As soon as the consumer started booking any reservations through OpenTable, the system exploded, 'cause all of a sudden the restauranteur's saying, "Oh, they're, they're filling the seats." So that case was come for the tools, but then stay for the network. And so the sales rep that initially in San Francisco and New York sold three restaurants a month, the same reps in most cases seven, eight years later were selling 20. I mean, they're sell- they're ripping off one a day, because all of a sudden, "Hey, I've got all these tools. They're kind of interesting."

   13. AHAnu Hariharan10:42

       Mm.

   14. JJJeff Jordan10:42

       "I'm gonna fill your restaurant. And, you know, each person I'm gonna put in the restaurant's gonna bring 50 bucks. And your margin on that 50 bucks is 30%, so you're earning 15 bucks and you're paying us a dollar, you know, all day long."

   15. AHAnu Hariharan10:53

       Mm.

   16. JJJeff Jordan10:53

       And so that then, it, you know, it, it, the flywheel goes. By the way, that was city by city. So the fact that you had-

   17. AHAnu Hariharan10:58

       Mm

   18. JJJeff Jordan10:58

       ... sufficient restaurants in San Francisco meant nothing in Mi- Miami. So you started again in Miami, and in Tokyo, and in, uh, you know, in, uh, Munich, and it, it, it's, it's a slow roll-up.

5. 11:10 – 13:47

   Local vs. Global Launches: WhatsApp's Small Focus Group

   1. AHAnu Hariharan11:10

      Do you actually advise people then to, like, think about their strategy differently, you know, to go... Like, 'cause I would think people would stall if you, you can only get a local-

   2. JJJeff Jordan11:17

      Mm

   3. AHAnu Hariharan11:17

      ... but not get global. Like, do you, how do you sort of balance? I mean, I feel like there's a pressure these days to, like, go global fast. How do you make those trade-offs and decisions?

   4. JJJeff Jordan11:24

      I mean, different marketplace have different characteristics. The local ones are, are really hard and really slow, and it, but if you build them, they can be really valuable and really tough to overcome. So, you know, it is f- Virtually impossible to, uh, up- to displace OpenTable at this point. It's the strongest net- I've worked with some great network effects businesses, you know, eBay, PayPal-

   5. AHAnu Hariharan11:43

      Mm

   6. JJJeff Jordan11:43

      ... Airbnb, you know, Pinterest. It's virtually impossible to displace, uh, OpenTable from a, a restaurant right now.

   7. AHAnu Hariharan11:49

      Yeah.

   8. JJJeff Jordan11:49

      But they had to go market by market to do that. I mean, their, the eBay was instantly national, almost global, because if you were a... Take, there's 10 antique collectors on the service. It didn't matter-

   9. AHAnu Hariharan12:00

      Mm

   10. JJJeff Jordan12:00

       ... if one's in Michigan, one's in Miami, one's in Berlin. If they're collecting the same antique, there's utility there. And so that one was able to spin up much more seamlessly.

   11. AHAnu Hariharan12:09

       Yeah.

   12. JJJeff Jordan12:09

       The, the notion of the local marketplace, uh, which s- I know some of you in here are doing.

   13. AHAnu Hariharan12:13

       Yeah.

   14. JJJeff Jordan12:14

       [laughs] Are, is, uh, it has that extra, um, extra complexity.

   15. AHAnu Hariharan12:18

       I also think the question that you have to ask depends, uh, on what type of business you're operating. I think i- initially, the hunch is always, "Let's go global, get as many users," but I think the question you have to ask is can you truly measure your product market fit if you're not close to those consumers or you don't control the zones you're in? So for example, WhatsApp, right? It went global really fast, but it didn't start that way. Um, in fact, Jan used to, uh, hang out a lot at the, the Russian community in West San Jose, and his, the first feature of WhatsApp was literally just to show status, saying, you know, he just said, "Why can't there be just a status message on the phone that shows that I'm at the gym so that someone won't call me?" And so he rolled out that at the we- and he to- I mean, his focus group was literally the 50 people that he used to hang out with, uh, over dinner on Fridays, uh, in, in that community, and they would give him feedback on how they're using the product. Quickly he realized that they were using it to send messages to their family in Russia, and he was like, "Well, that was not why, how I designed this app for." Uh, but he sort of built features around that to make it more seamless, and that's really how WhatsApp started. So contra- you know, again, counterintuitive because you see their growth and you're like, "Wow, they went global really fast," which is true, unlike, you know, like say Airbnb, which took time to build critical mass. But even then, they actually in the initial days were so focused in their small control groups to make sure that they got the right product market fit.

6. 13:47 – 16:54

   Airbnb's Slow Start and the Myth of Overnight Success

   1. SCSonal Chokshi13:47

      Both of those examples that you guys shared with Facebook, OpenTable, those are familiar behaviors for people. What about a case like Airbnb in the early days where there is no such thing as the so-called sharing economy?

   2. AHAnu Hariharan13:58

      Mm-hmm.

   3. SCSonal Chokshi13:58

      Like, it's actually a completely foreign concept to say to someone, "Yeah, you, you can stay in my, in my room." Like, that's just, that's crazy at the time. How do you think about, like, what did they do there, and how do you think about other businesses that have that kind of a situation where they're doing something really new and they're trying to build a network effect?

   4. AHAnu Hariharan14:14

      Yeah, I think with Airbnb, um, and it's a classic case of a marketplace with strong network effects where they did not have any viral growth, right, to that. Because forget about renting someone's home. You would not let... I mean, something more personal than your phone is your home. They see your bed- they see your bedroom, they see your restroom. You're not gonna let a stranger in. So imagine how a company like that could take off. Uh, so their early days was really, really hard, but their biggest value proposition, it was, you know, that they could offer homes at much cheaper rates, especially when there were big conferences or events in the city and all the other hotels are sold out. I mean, that's literally how the concept was born, right? They rented their own place, literally rented their own airbed, uh, and they said, "Well, why can't we spin this into a company?" But, you know, they did that for their own home for a few times, but it did not take off instantly, so they really had to use traditional marketing and good design to sort of build that growth hack. So simple things they started doing were, was they started targeting all events, uh, in various places, and they would make specific advertising in those areas saying, "Oh, is the hotel sold out? Why don't you try air, bread and breakfast?" Um, in fact even, you know, in the early days, the, the story that goes around is that they, you know, they were, they found it very difficult to raise, so they actually remarketed their cereal boxes as Obama and McCain cereal boxes, and they actually used that money to sort of bootstrap the company. So it goes to show-

   5. JJJeff Jordan15:42

      D- during the election cycle, yeah

   6. AHAnu Hariharan15:43

      ... during the election cycle. So it goes to show, you know, the different steps that they needed to take to bootstrap. It almost took 36 months for them to build critical mass and see network effect, so it was not easy, but once you build that critical mass, you have huge defensibility.

   7. JJJeff Jordan15:57

      So, so one, one of the founder stories that's so entertaining and so, and almost always so patently false is the overnight success. I had dinner with Brian last night. He's been at Airbnb nine years.

   8. SCSonal Chokshi16:07

      Wow.

   9. JJJeff Jordan16:07

      I mean, you know, it's-

   10. SCSonal Chokshi16:08

       [laughs]

   11. JJJeff Jordan16:08

       ... kinda like... So you know, it's, you know, in the last, the last three or four have gone really well. Um, you know, the first, um, Ben Silbermann at Pinterest, nothing happened there for two, three years. Nothing. He was just, he just kept working for product market fit, you know, with his dozens of users and then 100 user, whatever. And then he got it, and y- you know, figured out the hack to get critical mass of content that then attracted the users, and it goes straight up. But th- this, this overnight success is, is, is rare in our, in our experience.

   12. SCSonal Chokshi16:36

       Mm-hmm. So I think we should drill down then, because if I'm in those founders' shoes, how do you know to hang in there? Like, what are the signs, the metrics? Like, okay, uh, I'm gonna just stick around for another 10 years, or-

   13. AHAnu Hariharan16:45

       [laughs]

   14. SCSonal Chokshi16:46

       ... I have some sign here. So how do we tell? Let's walk through some case studies just to have the data, 'cause we use a lot of words.

   15. AHAnu Hariharan16:52

       Mm-hmm.

   16. SCSonal Chokshi16:52

       I mean, let's look at the numbers.

   17. JJJeff Jordan16:54

       Yeah.

7. 16:54 – 20:28

   Case Studies in the Data: Facebook, Angry Birds, Medium

   1. AHAnu Hariharan16:54

      So this is, so the first example we're gonna share is actually Facebook, and the reason we used Facebook was to tease out, uh, the difference between viral growth and network effect, right? So this is the chart usually startups show at the start, like, "Hey, we're growing really fast. Uh, you can see that we reached, you know, 800 and, 800 million plus MAUs, uh, in a very short timeframe." So the chart looks great. But this is what we... And, and Facebook did this with pretty much zero customer acquisition costs, right? They didn't spend a dime. But this is what we would call a speed of adoption, which is growth. This does not tell us whether there is a network effect. What tells us whether there is a network effect is actually this, which is even as they s- kept growing their retention, so this chart shows daily actives divided by monthly actives, and you can see that it kept growing from 45% to 57%. And Facebook was actually one of the first platforms to actually do that. There's... Because usually you've never heard where, oh, you increase users, do you actually increase the usage? That was not the norm. And so that's the sign of network effect. And so y- And this metric is different depending on what type of company you are. For a marketplace, like for Airbnb, you would actually look at the number of guests that booked rooms and how that trended over time, right? That would be the sign of the network effect. And we wanted to show the other example. Angry Birds, they have a similar curve. They did, uh, you know, lots of downloads, and if you looked at the user graph, it was high. So they had viral growth because people were playing the game and they really liked it and they talked about it, so they may have acquired all those users with zero customer acquisition cost. But did they really have a network effect? You know, not really because if I'm playing the game and you're playing the game, that doesn't necessarily mean I'm getting ex- more value just because you're playing the game as well, and which is sort of why in the gaming world you do see where, you know, new games come, like the next Angry Birds was c- you know, Candy Crush, and so on, right? So I think the key is really to tease out is this viral growth or is this network effect? The last example I would share is, uh, with Medium. It's, uh, one of our recent portfolio companies, and so we wanted to include, uh, one of the case studies which was slightly early because it's not easy to, you know, sort of see signs of network effects. So Medium, Medium's user growth chart is quite good. You know, they're adding a lot of unique visitors, and they're acquiring them with pretty much zero customer acquisition cost. But how do you actually say whether there is a sign of network effect? So what we wanted to find out is, well, how are people finding Medium articles? Because if, if I discovered Medium through Twitter or Facebook, then if I really liked it that much, am I coming back to Medium directly, or am I still finding those articles through other sites? So one of the things they explicitly measure is how much... You know, people spend a lot of time reading articles on Medium, but how much of that came directly from Medium versus through social, which is Facebook or Twitter, or even other channels? And you can see especially for the non-viral posts, which is what they call the tail, because the top viral posts will always be viral. People will refer it everywhere, and it goes. But for the non-viral posts, Medium is actually the biggest source for the traffic, which was, you know, early indicators that they are able to match... It's like a marketplace. They're able to match the readers to the right writers, and so those posts are also getting attention, and it's happening directly on Medium. So the question you have to ask for network effect is, depending on your business or company that you're building, what is that aha moment that gets the user back to your site or your app without much effort?

8. 20:28 – 23:52

   Reading Early Micro Signals and Small Experiments

   1. JJJeff Jordan20:28

      And, [clears throat] and the other thing is, I mean, these are all macro reads. Um, you know, w- we, we're trying to make that call. You're trying to make that call early. We're trying to make that call early, it, on your companies. Um, and so you're trying to tease out what might suggest that these macro things will kick in over time, and typically, that's micro things. And so in OpenTable, the entirety of my diligence on the company was show me San Francisco. You've been in San Francisco the longest. Show me how the key metrics are going in San Francisco. And so it turned out sales post productivity exploded over time. The number of reservations per restaurant exploded over time. The percentage of those re- reservations that came from the OpenTable website versus the restaurant website changed dramatically over time. The, you know, the, I mean, just every- the attrition of restaurants went down over time 'cause you... you know, the company's providing more value. So it was pretty obvious early on at OpenTable it, when you took the micro thing, you know, that okay, San Francisco's working, and that gave, before you even got there, the, the management team and the board the confidence, okay, we're gonna step on the gas and start opening tons of new markets even though it, they took years to turn profitable. They said, "Okay, this case, if you build it, they will actually come." Um, now, y- different, you know, so we go into markets. You know, Zuckerberg was pretty obvious that on Harvard it was working. It wasn't necessarily obvious the business was working, but if you went into your in, you know, your petri dish or your test tube and said, "Okay, I made it work there. I made it work in the Russian community in San Jose. Their behavior is showing increasing returns to scale." And so the b- best advice I have is try to, you know, and typically both to launch and then to measure is, is run the small, if you can, run the smaller experiment. S- make s- you know, validate that it's working for you. If it's working, tell us, and then, um, uh, the, the, uh-

   2. AHAnu Hariharan22:18

      [laughs]

   3. JJJeff Jordan22:18

      But that, I mean, that really is how you do it. In eBay, w- the early thing was collectibles. Collectibles just exploded on the platform because the needs of that community trading in the analog world were so horribly not met, and it turns out the v- the venture guy who made the investment at eBay was Bob Cagle at, uh, Benchmark Capital. Bob, who happened to come from, uh, Michigan, and, uh, there's a craftsman in Michigan who does really beautiful, and I'll remember the name, decoy ducks for, for hunting. It's, uh, Oscar Peterson was the craftsman's name, 'cause it's also the name of the pianist. That's the only reason I remember it.

   4. AHAnu Hariharan22:52

      [laughs]

   5. JJJeff Jordan22:53

      Bob went on this black-and-white website that sh- was, uh, also had the Ebola virus and Area 51 on it.

   6. AHAnu Hariharan23:01

      [laughs]

   7. JJJeff Jordan23:01

      Three things on Pierre's homepage. And searched for Oscar Peterson duck decoys and found, like, five, and he goes, "I spend my summer driving around Michigan looking for these. I went online, and there are five here." And so, I mean, he was in... Th- that literally was put him in the, in the deal. But, you know, it's those little early... You know, you're, you're seeking those early signs that, you know, the behavior is happening at a small scale. If it's happening at a small scale, you probably can replicate it on the larger scale. If it's not happening on the small scale, you have to, ah, you know, you gotta figure out how do you get product market fit, and that's where if you're thinking of, uh, going to work at, uh, Yahoo, you know, for a steady paycheck, um, you know, the, if you can't get any of the small experiments working, that's when you might wanna start thinking about it.

   8. AHAnu Hariharan23:49

      I, I wanna push back on one thing though, which is-

9. 23:52 – 25:36

   Replicating Beyond the Silicon Valley Bubble

   1. SCSonal Chokshi23:52

      If you're in San Francisco, it, it feels like what happens in San Francisco is not gonna happen everywhere else.

   2. JJJeff Jordan23:59

      It doesn't stay in San Francisco.

   3. SCSonal Chokshi24:00

      No, exactly.

   4. JJJeff Jordan24:01

      Okay. Sorry.

   5. SCSonal Chokshi24:01

      It doesn't fly to Vegas.

   6. JJJeff Jordan24:02

      Yeah, yeah, yeah.

   7. SCSonal Chokshi24:02

      Exactly. So if you're building a business in Silicon Valley where you do... We are in a little bubble in a lot of ways.

   8. JJJeff Jordan24:07

      Yeah, that- that's-

   9. SCSonal Chokshi24:08

      Like, people are doing very unique things, and I think that's why I'm glad you brought up the example of, like the Michigan example, Pinterest.

   10. JJJeff Jordan24:13

       Yeah.

   11. SCSonal Chokshi24:14

       I'd love to hear your thoughts on what that means for figuring out whether there is a network effect.

   12. JJJeff Jordan24:17

       Yeah. So to, to amend it a little bit, in local businesses, we typically look that they can replicate it-

   13. SCSonal Chokshi24:22

       Mm-hmm

   14. JJJeff Jordan24:22

       ... in a market outside of the market they live in, because that kind of suggests scalability.

   15. SCSonal Chokshi24:27

       Yeah.

   16. JJJeff Jordan24:27

       So if someone in San Francisco-

   17. SCSonal Chokshi24:30

       Yeah

   18. JJJeff Jordan24:30

       ... uh, you know, a, a great example, and I don't think he would be upset if I used it, um, Cherry. Uh, Cherry worked great. I mean, the Cherry g- uh, uh, car washes, it was on-demand car washing. They were up and down this strip outside of Sand Hill Road every single day. There'd be like three Cherry guys washing VC's cars. [laughs] A little embarrassing.

   19. SCSonal Chokshi24:50

       [laughs]

   20. AHAnu Hariharan24:50

       [laughs]

   21. JJJeff Jordan24:51

       Uh, and then you're like, "Okay, can I see this working in Minneapolis in the winter?"

   22. SCSonal Chokshi24:55

       [laughs]

   23. JJJeff Jordan24:55

       And, you know, you're just kinda like, "Oh." Um, so I mean, that, that was an example.

   24. SCSonal Chokshi24:58

       Right.

   25. JJJeff Jordan24:58

       Okay, we wanna see it, you know, replicate outside of an environment where it's, um, you know-

   26. SCSonal Chokshi25:03

       Yeah

   27. JJJeff Jordan25:03

       ... e- either uniquely economically affluent or, you know, highly convenience focused and, and things along those lines.

   28. SCSonal Chokshi25:09

       Right.

   29. JJJeff Jordan25:09

       But yes, we, we typically look in local businesses, they can replicate it outside of the initial market because that then talks to scalability.

   30. SCSonal Chokshi25:17

       Yeah. Right. I mean, the city, a city is the original network effect.
10. 25:36 – 28:44

    On-Demand, Ride Sharing and the Hacks That Jumpstart Marketplaces

    1. SCSonal Chokshi25:36

       Do those trends have network effects?

    2. AHAnu Hariharan25:38

       Mm-hmm. Yeah, so I think I would combine, you know, I would call ride sharing, uh, even food delivery, all of those, I would put them, like the on-demand category in general, I think it's a new phenomenon after mobile, which has made it really easy for consumers. So the way to think of it is, um... So if you look at ride sharing services, right? It's, you know, 10 times better than taking a taxi cab. The product is way better, and consumers use it, but it's a city by city rollout, to a large extent, like OpenTable. However, the difference, I would say, in a ride sharing service, it's a point to point service. In OpenTable, you offered the tools to the restaurants, and then, you know, that's sort of, you know, the restaurants used it for the tool, and then you brought in the network, which is the diners, and, you know, you matched sort of the two sides. In ride sharing, it's really point to point, so I would say the general ride sharing, we think it's more supply side economies of scale. And what that means is the more drivers you have on the platform, you, you can make sure that you get a good quality driver within five minutes, but that's where it's tense, right? So it's like, it's almost like the Amazon first party, if you wanted to think of it, which is like, it's still a good business. We, we just call it as different, but just, you know, supply side economies of scale, which is scale economy versus a network effect. However, if you look at L- Lyft Line and Uber Pool, I think those could have network effects because think of this, you're a rider. You want more riders using those because then you can share a ride to San Francisco from Palo Alto, and therefore, have a cheaper ride, right? And you want more riders every place. Maybe you travel to New York and you want people to be using Lyft Line and Uber Pool there as well. So I think there is a subtle nuance, uh, is what our view is.

    3. JJJeff Jordan27:18

       I mean, talk about hacks. I mean, Uber's early hack was they're gonna subsidize enough cars to drive around a, a city to provide a minimum level of service that the consumer found attractive. And then as consumers find it attractive and start booking more sites, they have to subsidize less, and ultimately, the subsidize disappears from the city. Instacart's hack was, uh, you can order from any grocery and they'll go get it to you. They'll mark the crap out of it, and but early on they'll be showing those grocers that, "Hey, you can get some pretty good demand for people who can... who wanna have groceries delivered." They went back to those same grocers and are cutting deals, and now I believe well over half of their ent- entire deliveries are not marked up. They're through deals with grocers like Whole Foods. But the hack to jumpstart it was, "Okay, I don't have time, I, I, I don't have the time or credibility to do those deals with the grocers until they experience the flow of orders," so the hack was, "Okay, I'm gonna mark it up, and then I can afford to do it for a while, and then as quickly as I can, I'm gonna try to leverage the volumes into a, into deals, and then let me provide a better consumer service." So every business we see has an attempted hack. If you come in and say, "Oh, I don't really know how this... You know, I'm gonna f- the chicken and the egg," you know, not, not the best answer. You have to try to figure out, "How can I get this going?"

    4. SCSonal Chokshi28:32

       [laughs]

    5. JJJeff Jordan28:32

       Right? Which side starts? What is this?

    6. AHAnu Hariharan28:33

       Mm-hmm.

    7. JJJeff Jordan28:33

       You know, and, you know, the deck lays out a whole bunch of different approaches that different companies have used to try to solve that one fundamental problem is, in a two-sided network, who shows up first?

11. 28:44 – 32:26

    Paid vs. Organic Acquisition and ROI

    1. SCSonal Chokshi28:44

       Besides this network effects deck, you guys participated in a post we wrote around 16 metrics-

    2. AHAnu Hariharan28:49

       Mm-hmm

    3. SCSonal Chokshi28:49

       ... and 16 more startup metrics. I think it's worth bringing that up because you're talking about discounts and subsidies as part of a model to create that hack. And then the other thing is, in that same post, we talked about the difference between paid versus organic marketing-

    4. AHAnu Hariharan29:01

       Mm-hmm

    5. SCSonal Chokshi29:01

       ... and the value of those. So if I'm doing a network effects business, and you see as an investor, like, okay, well, you've done a lot of paid marketing versus organic marketing to get this network, is that a bad thing? Is that a good thing? I mean, how do you tease it apart?

    6. AHAnu Hariharan29:14

       I think that it's really... Uh, I mean, it's, there is no definitive answer. It really depends. So I'll take the example of Airbnb. You know, it was very difficult to build the critical mass initially, and it was a strange concept for them. But on the demand side, they were able to hack with traditional marketing, and, you know, they were, they had really great hacks around how they bootstrap demand, so they were really not spending much on demand. You know, it's, it's contrary to everything we know because travel, people travel only twice a year, how do I do it? But they were really good at doing that in the initial days. But supply was really hard. You know, how do you get a host comfortable to list their home? Uh, how do I target the host? Uh, so they did end up spending dollars on it. So w- it's not that we are, you know, it's not... Sometimes you may have to figure out w- you know, there are lots of papers on this, on marketplaces, which is, what is your money side and what's your subsidy side? I think for Airbnb, supply was really hard, so they were, they spent dollars, uh, right from the early days to acquire the host. But in those cases, you have to ask yourself- What is the return on investment if I am paying to acquire the user, right? So what is my order value per transaction, and what's my lifetime value? If you do have good ROI economics, like the CAC versus LTV, then-

    7. SCSonal Chokshi30:26

       I'm sorry, just to say CAC versus LTV, so the different acquisitions are

    8. AHAnu Hariharan30:28

       Which is customer acquisition cost versus the lifetime value that you're getting from the customer. Then you can spend, because there are certain sectors where you have to. Travel is one where you have to, because the velocity of use case is really low. Uh, but you just have to be sen- you know, the thing that you don't want happening is where you're paying lots of marketing dollars to acquire users, and then when you sort of dial down your marketing dollars, the growth also slows down, because that means you've been spending a lot of money to acquire and drive the growth, but the company itself or the product itself is not sustaining that. So that's the thing we really try to tease out, is if you're doing paid marketing, is, you know, why are they doing paid marketing, what's the ROI, uh, return on investment from that marketing, and is it, you know, is it truly showing retention?

    9. JJJeff Jordan31:13

       One observation, a lot of the best networks that are f- platformed here aren't spending anything on con- on acquisition. I mean, it's just, it's kind of an interesting thing-

    10. AHAnu Hariharan31:19

        Yeah

    11. JJJeff Jordan31:20

        ... in marketplace. Facebook, no. WhatsApp, no. Medium, no. Um, you know, just OpenTable, no.

    12. AHAnu Hariharan31:25

        Yeah.

    13. JJJeff Jordan31:25

        J- you know, just, they, they're not spending on acquisition. The model is delivering it. If they are spending on acquisition, eBay, I was the biggest advertiser in the world on, d- digital advertiser in the world for a number of years. They were spending, but the, what happened is the more they spent, the more valuable the service was to the user.

    14. AHAnu Hariharan31:42

        Mm.

    15. JJJeff Jordan31:42

        So it was a component of the PNL, but those users demonstrated network behavior, and the, the contra example is, okay, an e-commerce business, you're, you know, you can pour money on it, you can grow like crazy. I've been an investor in a few of them that actually are no longer around that grew like crazy. But, you know, the only reason you're growing is the marketing spend, and when, you know, as Anu, Anu said, when you pull back on it, they, they don't come anymore. There is no network effect there. It was just a growth effect.

    16. AHAnu Hariharan32:08

        Mm-hmm.

    17. JJJeff Jordan32:08

        And so the, you know, the key is how do you tease out that? So it's not that you don't spend, it's surprising how a lot of the most valuable network businesses didn't spend virtually anything. They, they've, the, the, the hack, they figured out the hack.

    18. SCSonal Chokshi32:22

        Well, I'll do one last question, then we'll open it up to everyone for questions.

12. 32:26 – 35:20

    When to Monetize: Dispelling the Growth vs. Revenue Dichotomy

    1. SCSonal Chokshi32:26

       It's the question that probably, you know, your entrepreneurs hate getting from their investors-

    2. AHAnu Hariharan32:29

       [laughs]

    3. SCSonal Chokshi32:30

       ... which is, or, or maybe they wanna know, which is when to monetize, and how do you figure that out?

    4. AHAnu Hariharan32:35

       I should say that as investors, you know, we're not gonna push anybody to monetize-

    5. SCSonal Chokshi32:38

       [laughs]

    6. AHAnu Hariharan32:38

       ... because I know it is sort of a debate everybody has. It's more h- you should think about when to monetize, and what types of monetizations do you have, uh, in the plan? But we've seen companies at all stages, right? So Facebook didn't monetize for the longest time. They were building a social network focused on users, and now, you know, they, they d- they monetized quite later, but they're doing it beautifully now. Versus marketplaces on the other hand, you do tend to see them monetizing a little earlier. Why is that the case? Because there is a transaction that is flowing through the marketplace already. So let's take OfferUp, our portfolio, for example, right? There's a lot of transactions going on. People, the se- sellers are listing their items, buyers wanna buy the items, and so there is a transaction happening. Now, if you actually turn on payments in marketplaces, it actually improves the overall process, right? You don't want to, you know, meet the seller and then message them and just say, "Let's meet outside," versus you actually wanna be able to send the credit payment directly so that the transaction is done. So it improves, uh, the experience, and so you can actually turn on monetization sooner, and you tend to see that in marketplaces. So I think it really depends on the stage of the company, where you are, and what sort of product market fit you have, and when you can turn monetization.

    7. JJJeff Jordan33:52

       Yeah, I mean, I think the business models are really different. I'm, I, I actually think there is a meme with a false dichotomy that it's either growth or monetization.

    8. AHAnu Hariharan34:00

       Yeah.

    9. JJJeff Jordan34:00

       And, you know, it's, it's just a little bit like, okay, you've got 100 people in the company, and you can't have, you know, any on, an- you know, you have to pick one or the other, and no one else is allowed to cross over. You're just a little, you know, it's there. We've had a couple companies that shifted in the c- current capital environments and the uncertainty there, shifted from growth at all costs to, you know, kind of smart growth mode or whatever you wanna call it. The i- amazing thing, the profitability improved dramatically. The growth in a lot of the cases didn't slow down. [laughs] And you're just sitting there-

    10. AHAnu Hariharan34:30

        [laughs]

    11. JJJeff Jordan34:31

        ... kinda like, huh.

    12. AHAnu Hariharan34:32

        Huh.

    13. JJJeff Jordan34:32

        You know, just like, oh, wait, you went from spending all that money to not spending much money, and it's still growing the same. So it, for me, I, it's, I worry sometimes it's a false dichotomy. I think in a marketplace business, if there's money flowing through it, you should be able to demonstrate you can capture some of it early on or, I, I mean, if not, I'm trying to figure out if you're actually adding value to both sides of the marketplace and they, why wouldn't they be willing to pay?

    14. AHAnu Hariharan34:53

        Mm-hmm.

    15. JJJeff Jordan34:53

        So a marketplace without a, a monetization model is a little bit like, uh, really? Um, you know, something like Facebook you have a little more of a call on, uh, or Pinterest, you know, being one, you know, their pr- multi-billion dollar value pre-revenue business. Um, you know, the question is, you know, it, it, there is a legitimate when question.

    16. AHAnu Hariharan35:10

        Mm-hmm.

    17. JJJeff Jordan35:10

        But yeah, I, I mean, typically we think there's more reasons to do it early than not to do it early on average.

    18. SCSonal Chokshi35:17

        So no false dichotomies. And let's open up to questions.

    19. SCSonal Chokshi35:20

        Uh,

13. 35:20 – 41:02

    Audience Q&A: OpenTable's Competition and Branded Marketplaces

    1. SCSonal Chokshi35:20

       so when you think about the OpenTable business model-

    2. JJJeff Jordan35:23

       Yeah

    3. SCSonal Chokshi35:23

       ... and originally you were selling software into restaurants, I'm guessing you had competition that was also s- trying to sell similar software. At what point did... So, and that one must've been like a feature war and classic competition. At what point did the amount of reservations that you were driving become enough of a hook for why restaurants would always choose you g- as for the software? ... that it didn't matter that a competitor had a certain feature or, you know, a couple small things.

    4. JJJeff Jordan35:49

       It's a fantastic question, and it's got a w- it's got a unexpected ending. Um, there were three companies trying to do exactly the same thing, um, at exactly the same time in the late '90s, early 2000s. Um, one raised a round right a- before financial Armageddon came in, and a nuclear winter set in for literally it was a half decade in terms of funding new companies in the first half of the 2- 2000. OpenTable got, raised enough money and s- and spent it so slowly they were able to survive. The two direct competitors didn't. OpenTable ran unopposed for five years, which is the only reason they were able to get to their network effect. eBay, uh, when I, I was there during that time, enjoyed the same thing. I mean, there was no company formation for five years, so, you know, we were nascent in a lot of markets and a lot of product lines. Um, and, uh, we just had, we were unopposed for five years. So it, when people get scared of the current market, it's like, yes, be scared, but also there's advantages in it.

    5. AHAnu Hariharan36:43

       Mm-hmm.

    6. JJJeff Jordan36:43

       If, you know, if capital dries up to your competitive set and you've got, you know, you've got access to capital, whatever it is, it c- it actually can be, it can be an attribute in there. But, um, I mean, if OpenTable had... Uh, actually, uh, Grubhub just went through this. They, they didn't have nuclear winter, and they ended up having to roll up three or four companies to, to win the market. They, Seamless, Campus Foods, you know, they... Camp- Campus Foods set out campus, Seamless won a couple key markets like New York, you know. And so Grubhub's a, a roll-up. HomeAway was a roll-up. Um, you know, there, there wasn't a source of differentiation that was meaningful other than local geographic, and so they pieced it together. They, they went out of business, yeah. Yeah, and then, and so OpenTable ran unopposed because they, they couldn't make payroll, and then that was incredibly inform- formative to that company because the network was so slow to build. It was the slowest network I've ever seen to build. It, it's amazing it worked. It wouldn't have worked without the capital environment in anything like its current form. And we, we have some local investments. They have to go faster than OpenTable went. I mean, Instacart's going faster, OfferUp's going faster. Just they're more virtual. They didn't have, they don't ha- they didn't have to physically convert each restaurant one at a time.

    7. AHAnu Hariharan37:52

       Mm-hmm.

    8. JJJeff Jordan37:52

       And the average owner of a, restaurants on OpenTable owns one unit, so it literally door to door trying to do it. So it, it, it's, it's a business that wouldn't work today.

    9. SPSpeaker38:03

       Hi. I have a question for you that I think is maybe about branding but maybe not. When you were at OpenTable, were you ever tempted to, uh, offer a private label version of OpenTable-

    10. JJJeff Jordan38:15

        Mm-hmm

    11. SPSpeaker38:16

        ... for a segment of the population-

    12. JJJeff Jordan38:17

        Oh, yeah

    13. SPSpeaker38:17

        ... that really wanted to be special?

    14. AHAnu Hariharan38:19

        Mm-hmm.

    15. JJJeff Jordan38:19

        Yeah.

    16. SPSpeaker38:19

        'Cause that's kind of what we're facing right now, where we have an opportunity to private label to a certain population that thinks that they should pay 10x for the same accounting 'cause they're just really special in some way.

    17. JJJeff Jordan38:30

        Yeah, yeah.

    18. SPSpeaker38:30

        Yeah.

    19. JJJeff Jordan38:30

        We, we need to have special. So, uh, one of the things that made restaurants an attractive marketplace... Well, when I first met with my predecessor, Thomas Leighton, the first thing I told, "This is an ingenious model. Where else can I apply it and start my own company?" [laughs]

    20. AHAnu Hariharan38:42

        [laughs]

    21. JJJeff Jordan38:43

        It di- that didn't work. Um, the, uh, what made OpenTable interesting was two things. One was the incredibly high degree of fragmentation, which was a bug when you're trying to aggregate it, but once you've aggregated, it's a feature. And the second was lead gen was a really important part of the restaurant experience. Most people don't want to eat at the same restaurant every night, and so p- OpenTable, you know, would put new butts in your seats, butts who'd never been there, that you're trying to get. So we, when we, we started with mom and pops, started winning the chains. The good news is the chains would only have, uh, 100 restaurants, you know, McCormick & Schmidt, Maggiano's, um, there are a couple other M's in there, I mean, Morton's. They, they only had, like, 100 restaurants, but they would say, like, "We're Morton's," and, you know, and they, they'd demand it. We, we held firm on, on two things. One is we branded everything, and so if they didn't want it, they didn't get it, um, and it was such a unique service that they couldn't afford to build it on their own at 100 units. The other was, uh, we forced a redirect from the M- Morton's website to the OpenTable, Morton's page on OpenTable to create the brand awareness, and that forced off, that forced redirect, the fact that we converted restaur- people searching on Google for Morton Chicago into OpenTable users is th- is the OpenTable growth hack. I mean, that, that, that was the OpenTable growth hack by far. Because the supply base was so fragmented, we were able to pull that off, and, you know, and, and able to do that. There's, uh, uh, I'd contrast that with Fandango. Fandango basically has probably six or seven customers.

    22. AHAnu Hariharan40:14

        [laughs]

    23. JJJeff Jordan40:15

        They're the large movie theater chains. It's AMC. It's whoever. And those guys could build their, their own thing, and every once in a while they pull out of Fandango. Like, you know, AMC two years ago I think pulled out of Fandango, and they could because they had the scale. I'd go... If, uh, I go to AMC Redwood City, if, if they're not on Fandango, I'll go to AMC, and it's like, oh, I can buy it through them because they have that level of critical mass. So part of it is the market you're at. Do you have suppli- Do suppliers have power, or does, is the marketplace more?

    24. SPSpeaker40:43

        We have multiple suppliers.

    25. JJJeff Jordan40:44

        Yeah, then that's, that sounds pretty fragmented to me. [laughs] So, and then branded marketplaces we would value much more highly than white label.

    26. AHAnu Hariharan40:55

        Mm-hmm.

    27. JJJeff Jordan40:55

        Because white label becomes you're selling a utility.

    28. AHAnu Hariharan40:57

        Mm-hmm.

    29. JJJeff Jordan40:57

        You're selling s- software.

    30. AHAnu Hariharan40:58

        Yeah.
14. 41:02 – 48:09

    Brands, Data Network Effects, and External Shocks

    1. SPSpeaker41:02

       Hi. Do you believe in the idea of network effects, um, with brands? So for instance, Nike, the more people that think Nike's cool, the cooler it gets, the more people-

    2. AHAnu Hariharan41:12

       Yeah

    3. SPSpeaker41:12

       ... think Nike's cool and...

    4. AHAnu Hariharan41:14

       Yeah, I think we've had a... Again, you will hear differing views in our firm. [laughs]

    5. SPSpeaker41:17

       [laughs] I think we all have different opinions on this one.

    6. AHAnu Hariharan41:19

       Yeah, and we've talked about this, whether brand has a network effect, and the... [laughs]

    7. SPSpeaker41:23

       [laughs]

    8. AHAnu Hariharan41:23

       See? Um, we actually... And it's funny, in the deck we actually, that's why one of the charts that made it there was, I don't know if you've seen it, but there are three types of laws we call it, which is Sarnoff's law, Metcalfe's law, and Reed's law. So for brands, we actually think it's more like Sarnoff's law. You know, some people argue, yes, it has some network effect, but not directly incredibly value to the user, which is why the value is not- As steep as Metcalfe's law, for example. Uh, but the other side of the argument you usually hear is, "Well, that's like, you know, it's almost like Angry Birds," you can argue. They didn't have a br- I mean, they died down and they go. But when you're playing the game and the game is hot and still having conversations about it and, you know. But you have to start... The question is, is that really value and sustainable value? Um, and is that something we would call a network effect?

    9. JJJeff Jordan42:09

       It's a really intriguing question.

    10. AHAnu Hariharan42:10

        [laughs] Yeah.

    11. JJJeff Jordan42:10

        I th- I think it's a, I, I think it's a different source of value and a different sustainability.

    12. AHAnu Hariharan42:15

        Yeah.

    13. JJJeff Jordan42:15

        Um, you also run into the diseconomies. Once everyone's wearing Nikes, uh, people stop wearing Nikes, so you're kind of, um... I worked at Disney, uh, when it was, uh, a long time ago, when it was very, very hot on the consumer product side and, you know, we couldn't sell enough. And then five years later, you can't give it away to the same audience, and, you know, just kind of, you know, Disney became, you know, that, I was there in the years of Lion King and all those, and then Disney Animation hit a, uh, hit a pause button, Pixar cleaned their clock, and you c- you literally couldn't give away Disney stuff. So it, you know, you know, one of the most valuable brands in the world has done... And Nike's done a little bit of it too. They're, they're hot and not, back and forth. So I, you know, the brand and the fashion overlay, uh, I think it, it, I mean, I, I think they're unbelievably valuable commodities. I'm not sure I'd call it a network effect.

    14. SCSonal Chokshi43:00

        Uh, going back to your statement about come for the tool and stay for the network or the community, um, it seems like the some of the strongest network effects actually happen when people, uh, not only use a tool from the top down, um, so, uh, Nike-branded shoes or, um, an app from Uber, but when customers or users give back data-

    15. JJJeff Jordan43:20

        Mm

    16. SCSonal Chokshi43:20

        ... or create something which then adds to the network, that we benefit in a stronger and mo- more coherent way when we have a creative tool or something that someone... Even if it's a, a post on a Facebook wall. And I guess I'm curious to know if you think that there's room for more creativity there, um, that these tools are actually, um, better at creating network effects or faster or, uh, it looks like Pinterest took a long time, but I'd be interested in, in that perspective.

    17. JJJeff Jordan43:47

        When Pinterest started working, it went very fast.

    18. SCSonal Chokshi43:49

        Mm-hmm.

    19. JJJeff Jordan43:49

        It, but, you know, so it, it took a long time to get the product market fit, uh, to, to make it work. There's some fascinating ways entrepreneurs come in with the, the, you know, what is the value that more masses come. We're seeing more and more data network-based effects.

    20. SCSonal Chokshi44:03

        Mm-hmm.

    21. JJJeff Jordan44:03

        I mean, just, you know, companies are saying, like, "I'm doing this to get the data, and with the data, I can provide a vastly superior service, um, and here's why: A, B, C, D." Um, you know, the hottest job right now in the world is the data scientist. Both my kids are in college. I say, "You sure don't wanna get a PhD in- [laughs]

    22. SCSonal Chokshi44:20

        [laughs]

    23. JJJeff Jordan44:20

        ... in machine learning, uh, data science?" Um, but you know, we're, we're getting more and more things coming at us with, you know, either a cor- corpus of content-

    24. SCSonal Chokshi44:28

        Mm-hmm

    25. JJJeff Jordan44:28

        ... or a, uh, l- just basically a data, we call it a database network effect, and there can be some really powerful ones where, you know, the, the aggregated data in the system. Pinterest should be able to put better content in front of you than anyone else, because they have so many more signals and so much more content.

    26. AHAnu Hariharan44:43

        Yeah, it could either in the form of personalization. It can also come in the benefit of B2B, I think, a lot more. For example, every, you know, a lot of these SMB players use shipping, right? And, uh, they can't negotiate great discounts like how Amazon does, because they consolidate. But if there is a shipping provider that is sort of s- servicing all of them, uh, a tech company, and it's collecting all the data, they can actually give better information back, uh, to the players in terms of, "Hey, if you're in Dallas or in this microzone, use this," or like, you know, they say it's priority, you know, two-day priority, but it actually goes overnight 80% of the time, so you can do money savings. So we are seeing interesting startups that are sort of tackling those problems using data that customers are contributing because the transaction happened on the platform, and using that to sort of give recommendations, better recommendations on who to use.

    27. SCSonal Chokshi45:31

        I was really curious if you had any advice, if there are adverse socioeconomic or political or geographic effects or even seasonal effects that could adversely affect the network effect. I realize I'm saying effect quite a bit.

    28. AHAnu Hariharan45:47

        [laughs]

    29. SCSonal Chokshi45:48

        [laughs]

    30. SCSonal Chokshi45:48

        Is there, is there any-

Episode duration: 48:09