Network effects are the holy grail for Internet startups looking for venture-scale returns. On a platform with network effects, the value to a user increases as more users use it. Facebook, Twitter, LinkedIn, YouTube, Skype, WhatsApp and many others benefit from this dynamic.
In an age when more than a billion people connect over a network and new networks reach multi-billion dollar valuations with a handful of employees, one is tempted to believe that online networks are almost fail-proof. But as online networks grow to a size never seen before, many question their sustainability and believe that they are becoming too large to be useful.
To explore the future of online networks, it’s important to note how network effects correlate with value and the factors that make these network effects work in reverse.
Network Effects and Value
There is a strong correlation between scale and value in businesses with network effects.Greater scale leads to greater
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