The Three Systems Beneath Network Effects

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Hello friends!

Today I have something special for you: my favorite chapter of The Cold Start Problem, a new book, coming out tomorrow, that’s one of the more interesting and detailed explorations of network effects I’ve ever read.

As you will see, it is equal parts love letter and rebuke towards the idea of a “network effect”—a concept that is both indispensable and yet totally oversaturated and misunderstood.

The author, Andrew Chen, is someone I suspect many of you already know. I first met Andrew back in 2011 when I had recently graduated college and moved to Palo Alto to join a startup. His essays shaped my foundational understanding of how startups can get off the ground and grow. So I reached out on a whim and a few weeks later was delighted to find myself wandering around with Andrew on University Ave, asking his advice on everything startups and career-related.

Then, as now, Andrew was absolutely dripping with insights about the forces that create viral success. He’s basically the opposite of the common thing you encounter in Silicon Valley, where people throw around terminology they clearly lack any functional knowledge of. And there’s probably no term more commonly abused than network effects. Yet it remains critical for anyone wanting to understand how market power works.

I was lucky enough to bump into Andrew a few months ago and pestered him to let me share a chapter of his book with you, so here we are!

Before we begin, let’s quickly set the scene to give you some context for this chapter.

Andrew’s overall goal for The Cold Start Problem is to propose a new theory of network effects that is more detailed and useful for practitioners than the abstract, academic versions of the idea that have prevailed to date. One classic example is Metcalfe’s law, which claims the value of a network is proportional to the square of its number of participants. Ask anyone in the field and they’ll tell you it’s neither true nor useful.

Instead, Andrew breaks network effects into five stages of development:

Cold start
Tipping point
Escape velocity
Ceiling
Moat

Each stage of network development has several chapters in the book that consist of case studies with the founders, engineers, marketers, and product managers that have actually worked with these forces.

The chapter below is from the part of the book covering the third stage of network development: escape velocity. In it, Andrew argues that network effects aren’t one single thing. There are actually three separate forces that benefit businesses in three distinct ways.

I took a lot away from it, and I’m sure you will too.

Here’s Andrew! Enjoy.