"Back in July, we wrote about network effects in marketplaces and social platforms and how they are critical to defensibility. In the post, we talked about the difference between direct and indirect network effects, and how they may or may not relate to virality. Since then, we have been further developing our investment thesis on social platforms and want to add more nuance to the discussion.
In our post, we defined network effects this way:
“When a new user/member is added to the network, it increases the value of the product or service to all other users.”
This definition (like many others we’ve read) mainly refers to the quantity of users: i.e. more is better. Most likely, this is because the concept of network effects originated in the commerce or software world where every new user brings the same amount of added value to the product or experience.
However, network effects work a little differently on social platforms – and the value of a network shouldn’t be measured just by size, but also by the types of users themselves. More specifically, you need to look at the underlying relationship between the new user and existing users, and/or the influence of the new user."