Creating Network Effects, with Eva Lau of Two Small Fish Ventures
In internet businesses, network effects reign supreme. They’re the force behind winner-take-all markets. Here’s a comprehensive framework by Eva Lau, operator-turned-VC.
Eva is a co-founder at Two Small Fish Ventures. Previously, she was Head of Community and Content at Wattpad and before that she was Director of Product Development at Brightspark Labs. At Wattpad, Eva scaled the community from tens of thousands to tens of millions.
Here’s Eva at TechTO in August 2017:
You have a network effect when the value that your product increases as more people use it. Facebook, Twitter, Airbnb and Uber: these are all network effect based companies. The network effect is also the building block for machine learning and blockchain. It is the most valuable asset that you can have in your product. It increases defensibility, and allows you to build more business models as your network scale.
Throughout the years I have invested and advised more than 10 companies, including Wattpad, all of which exhibit the same pattern when it comes to starting and scaling the network effect in their products.
I summarized that pattern into this framework:
A stands for atomic unit. It’s the smallest product unit which your users will gather around. At Facebook, a post is the atomic unit; Twitter’s atomic unit is a tweet; Uber’s is a ride, and for Wattpad it’s a story. Defining the atomic unit in your product allows you to define the type of network you are about to build. For Wattpad, having a story as the atomic unit allows us to build a social network for storytelling.
Once you have defined the atomic unit in your product then you’re facing the most daunting task of all: to kickstart the network. Why is it daunting?
Because it’s a chicken and egg problem. At Wattpad, when we first started there were no stories. Who is going to come on Wattpad to read when there aren’t any users sharing the stories?
So you move to S.
S stands for Seed your supply side. Wattpad did that by importing over 20,000 public domain stories such as Pride and Prejudice and Moby Dick onto the platform. The idea was to allow readers to find some stories to read on our platform and build the habit of reading on Wattpad. By doing that they helped us start attracting more readers and writers to come share original work.
S stands for Scale your demand side. Once you take care of the supply side, shift your focus to building demand. We did that by building mobile apps for devices. These mobile apps allow our readers to read wherever and whenever they like. We also developed a suite of very engaging features to encourage people to read more on Wattpad. Now with more people reading on Wattpad it attracts more writers to come and share their work. That’s where they can find the audience for their story.
So now you’ve got the supply side and the demand side going.
E stands for Enlarge the network effect coefficient. I define the network effect coefficient as the product of the number of users, the frequency of the engagement, and the number of connections they can have on your network. Basically you’re looking at the volume of a cuboid. The bigger the cuboid, the stronger your network effect.
All of the comments being posted on Wattpad and other interactions between readers and writers are connections that have allowed it to become a very strong and irreplaceable network for storytellers. Even if someone wanted to clone Wattpad with the exact same functionality, it’d be very difficult for them to replicate the same network.
T stands for Track proprietary insights. Wattpad made headlines on PerezHilton.com in 2010 with a proprietary data set. How did that happen?
There’s a feature on Wattpad called casting that allows writers to put together a dream cast for their stories as if they were going to be made into movies. Some writers would cast Harry Styles as a vampire and then Taylor Swift as the vampire slayer. It’s a very fun and engaging feature for our community. One day I decided to look into the dataset to see who the popular celebrities being casted on Wattpad were. Of course the top 10 list is basically a reflection of pop culture at the time. Eventually that list made headlines on PerezHilton.com. Once you have a large network going your proprietary dataset will become very valuable to other companies. Just like the casting data on Wattpad which paves ways for Wattpad to grow beyond a social network for storytelling. It allows Wattpad to transform into an entertainment company. In the last few years, popular stories on Wattpad have already been turned into published books, movies, and TV shows across the world.
In sum, again:
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