It is increasingly difficult to follow traditional vertical industry thinking because today’s technology enable ‘tech’ companies to span many verticals and geographies - that is why we focus on network effects. Companies with strong network effects have changed the business landscape forever. Good examples are the big four, Amazon, Meta, Alphabet, and Apple, which all have based much of their success on network effects. In fact NfX research showed that 70% of the value created in tech comes from network effects.
Because of the increasing challenge in having an industry focus we have chosen to rather specialise in network effects - because:
Value creation - behind 70% of the value created in the tech world (NfX research)
Tech enabled - it is greatly enabled by tech, data, and web3
Founder value - our skill set bring value to today's founders
Investor value - create greater returns for our investors
The product or service is built by and together with your users. What would Facebook be without user generated content?
Primary Network Effect
Self reinforcing product improvements fuelled by user generated data. Statistical and ML models get better the more data is put through.
Secondary Network Effects
The data generated in one product can often lead to opportunities for new products or services that no-one else can offer without doing the same user and data acquisition.
Share Value Created
To fuel the co-creation and network effects it is important to give back to those contributing and be balanced when charging for the product.
A study of S&P 500 companies over more than 40 years published in a Harvard Business Review article (HBR article) show that network orchestrators, companies with strong network effects, outperform the other business models, with:
lower marginal cost
These companies also have market valuations, a greater multiple of 2-4 times on average above the other business models. Our own experience tells us that the network orchestrators:
become profitable quicker
have more scalable products
have more M&A activities - gives relatively easier and quicker path to exit