Global and Local Network Effects

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Wikipedia

Each and every product carries a different and unique network effect. Network effects are very complex, and almost every aspect of the product or business you have built has an influence on its network effect. Because of this, some products have both a global network effect–a type of network effect that can influence all users, no matter what country they are in–and local network effects, which are usually limited to just one country. It is useful to understand the type of network effects your product carries, because it can help when making strategic decisions for growth outside of the initial target market. Below are the elements that construct the network effect of your product.

Demographics – The demographics of your users can be a factor in having global or local network effects. For example, the majority of the guests that book on Airbnb come from outside of the United States. Even with just its initial users, Airbnb has a demographic that probably travels a lot. This means that any additional listings on Airbnb from any country will increase its value for the entire user base. Uber probably has a good portion of users that travel (especially those who have used Black Cars), so many of its active users are benefiting from its aggressiveness in expanding into different countries.

Interaction – Products that have very visual interactions can have a wide global reach. Instagram is enjoyed by people from many different countries and cultures. There are follows, commenting, and liking between users from different countries. Every new user and all new content generated by users makes the product much more enjoyable for Instagram’s global user base.

Content/Supply – Can the content or supply be enjoyed by others in other countries? Fashion and pop culture content may have a harder time traveling to other cultures. Food delivery and daily local deal sites are hard for international users to benefit from. However, something very unique, for which there are people globally that see value–like with the artwork listed on Artsy–would probably have strong global network effects.

Use Case – In terms of global network effects, does the use case translate to different cultures and countries? Hotel bookings, travel, photo sharing, and messaging are universal use cases in most countries. On the other hand, there are areas that could be massively adopted in one country but would require special tweaking in other countries due to local culture, economic situations, and infrastructure such as transportation, payment, and financial products.

Almost every founder, at some point in running his or her start-up, considers expand into other countries. There are many factors to consider, but having a global network effect can give you a big advantage in winning other markets. The competitors and clones of your start-up in other countries may be able to copy your product, but they won’t be able to copy the network effects your product carries.

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Things to Consider Before International Expansion

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Photo by moyan brenn 

As the world becomes more connected and there is less fragmentation of the platforms used to distribute products, international expansion will start to look like an obvious choice and an inevitable path. However, there are things to consider before you start hiring to form an international expansion team.

Phase: The first thing to think about is whether you are ready to start expanding outside your primary market. Obviously, it doesn’t make sense to expand internationally when you are pre-product/market fit. You have to be at a phase where you aren’t trying to optimize your user acquisition, but at the phase of scaling up.

Leverage: Is the president using your product? Or are a third of the Fortune 500 companies paying for your product? If not, you need to figure out what you can leverage. This is important for PR, hiring, and business development in the country you are expanding into. A brand and credibility that the local market can recognize are important.

Landscape: It is important to understand the cultural, competitive, and regulatory landscapes of the market you are trying to enter. First, understand the strength of the local competition and your differentiators. If the differentiation is not strong enough and you don’t have a big enough lead, it will be very hard to outdo a local entrepreneur who is focused on just one market and has an advantage by being physically closer to the customers. This still applies even if a local competitor just makes a copycat of your product.

Expanding into another country takes as much effort as starting another company. Most likely, the same execution in the U.S. will not work in a different country. Early adopters may be different, nuances will be different, etc. Thus, you should also take into consideration the competition in your home ground. If you spread yourself too thin across multiple countries, you will give your closest competitor a chance to overtake you.

Culturally, does your product fit the market you are after? For example, in Japan tweeting was very right for the culture, and the country hods the record for the highest number of tweets per second. In contrast, LinkedIn found that in Japan, where the working culture is predominantly about loyalty and longevity to one company, getting people to upload resumes online was a steep uphill battle (times are changing though).

Are there regulations that will make it a challenge to provide the same product to the new market? Collaborative consumption, on-demand businesses, drones, and bitcoin all have to face different levels of compliance and regulations in each country.

Network effects: Do your current users, content, inventory or brand have network effects in the market you are entering? Being able to enjoy network effects from your home ground can make international expansion slightly easier.

I believe Facebook enjoyed some network effects in the U.S. that influenced users in Japan. Bilingual and international communities, and executives who frequently interacted with U.S. companies were strong early adopters for Facebook. Although these communities were small, they had high density, so this was a solid foundation for growth in Japan.

Although there are regulatory and cultural challenges in Japan, Airbnb is another example that has global network effects. Japanese users can use the same rooms as Americans use when they travel to the U.S. Any additional supply or demand on the platform from any country enhances the experience of Airbnb users in Japan.

International expansion is not just simply about translating your website into another language. A lot of reinventing and operational execution is required, which is capital hungry and time-consuming, so I suggest that you at least take the above factors into consideration before going forward.

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Venture Capital is a Service Business

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Photo by Dennis Skley

As more capital flows into the venture asset class, many VCs are making attempts to differentiate themselves. Some examples include building a community of entrepreneurs and mentors who can help each another, hiring in-house specialists and agents to support the founders, and using technology to share knowledge and connections between the partners and portfolio companies.

However, based on my interactions with many founders, what they appreciated most from their investors boils down to the following.

Trust: The investing partners do what they promised to do. There is transparency and candidness. The founders are trusted.

Professionalism: The investors are responsive and handle issues professionally.

Expertise: The investors provide the knowledge or expertise that can be leveraged to grow the company to the next level.

Access: The investors make introductions to people who can help grow the company.

Brand: The investors have a brand that can be leveraged for hiring, the next round of financing, winning customers, business development, credibility, etc.

These elements are very similar to the things we look for when selecting any other service business. In fact, the service sector is defined as the “soft” part of the economy, where people offer their knowledge and time to improve productivity, performance, potential, and sustainability, which is termed affective labor. The basic characteristic of this sector is the offering of services instead of end products. Services (also known as “intangible goods”) include attention, advice, access, experience, and discussion. (Wikipedia).

Offering attention, access, experience, knowledge, or time to improve productivity, performance, and the potential of clients (founders) sounds exactly like what is expected of us (investors).

Venture capital is a service business. No matter what sort of community, operational capacity, or technology is adopted to serve founders better, a service mentality by the investing partners is required to provide a great experience to the founders. I believe the quality of service is the greatest differentiator.

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