Network effects bring a powerful form of defensibility and exponential value creation. Network effects come in many forms and shapes but often as a "platform." The typical example is a marketplace that becomes more valuable for every buyer and seller that signs up. But it can also be other platforms (such as an operating system, data source, search, development language, or communications protocol). Work out your network effect and ask yourself how your product or service will become more valuable for every new user. Identify your nodes (e.g., users) and which links exist between these nodes (e.g., connections). The more valuable the links are, the better! Your users will be more motivated to use your product/service and less interested in shifting to a competing service. The best examples are social networks like Facebook and LinkedIn, which have become extremely valuable and almost impossible to compete against.
One important distinction to understand in the AI era is the data network effect: the idea that as more users interact with an AI product, the company accumulates more data, which improves the model, which attracts more users. This can be a genuine moat — but investors are increasingly sceptical of it as a claim, because the improvement loop only works if the data is proprietary, the model is trained on it continuously, and competitors cannot replicate it using public data. If you are pitching a data network effect, be prepared to explain precisely how your data compounds and why it cannot be replicated.
Network effects bring a powerful form of defensibility and exponential value creation. Network effects come in many forms and shapes but often as a "platform." The typical example is a marketplace that becomes more valuable for every buyer and seller that signs up. But it can also be other platforms (such as an operating system, data source, search, development language, or communications protocol). Work out your network effect and ask yourself how your product or service will become more valuable for every new user. Identify your nodes (e.g., users) and which links exist between these nodes (e.g., connections). The more valuable the links are, the better! Your users will be more motivated to use your product/service and less interested in shifting to a competing service. The best examples are social networks like Facebook and LinkedIn, which have become extremely valuable and almost impossible to compete against.
