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Product innovation is not enough to beat a competitor’s network effects

Jeremy Liew
Jun 17 · 3 min read
Wheels electric bike via TechCrunch

Product innovation does not beat network effects

We’d all like to believe that innovators with the best product win. Sometimes that’s true. But in the consumer world, where your product is easily observable by your competitors, product innovation is a fleeting advantage.

The ridesharing example

Uber started out as a high end limo rental service. Sidecar was the first to come up with now ubiquitous ride-hailing experience including crowdsourcing drivers and indicating destination (instead of origination location).

The daily deals example

Something similar happened in the daily deals space. LivingSocial led innovation in the industry, introducing features like “LS Escapes” (travel) and “Instant” deals (on demand), which Groupon followed with Groupon Getaways and Groupon “Now”. Groupon was able to roll these out to a greater set of both consumers and merchants. Network effects won out and eventually Groupon bought LivingSocial.

The social media example

The same could be said for Snapchat. Snapchat pioneered the stories format in 2013. At a time when all feeds were reverse chronological order, telling stories end-middle-beginning, Snapchat started telling stories beginning- middle-end. Snap also pioneered AR face filters which are incredibly popular. As a result, Snap grew incredibly fast, quickly reaching 110m DAU by December 2015. But then in August 2016, Instagram launched its own version of stories, and in May of 2017 it launched its own face filters. By mid 2017 it had more users of Stories than Snap. And while Snap is still a major social media company, its growth has slowed.

Conclusion

Network effects are very difficult to overcome. They give lasting benefit to the largest players in an industry. Sometimes smaller players believe that they can catch these winners from behind through product innovation. Often these smaller players have genuinely great teams with genuinely better products and insights. But it is rarely enough. Unfortunately, the leaders in industries with strong network effects cannot be overcome through product innovation alone.

Lightspeed Venture Partners

Lightspeed is a VC firm focused on accelerating disruptive innovations and trends in the enterprise and consumer sectors. Lightspeed has backed 350+ companies globally in the past two decades including Snap, Honest Co., GIPHY, Nest, Nutanix, AppDynamics and MuleSoft.

Jeremy Liew

Written by

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Lightspeed Venture Partners

Lightspeed is a VC firm focused on accelerating disruptive innovations and trends in the enterprise and consumer sectors. Lightspeed has backed 350+ companies globally in the past two decades including Snap, Honest Co., GIPHY, Nest, Nutanix, AppDynamics and MuleSoft.