18 May 2020

The Data Matrix and the Data Decay Dilemma

Data Network Effects

The growth in internet adoption, among both businesses and consumers, has led to an explosion in the volume of data in the world. This has naturally led to more entrepreneurial interest, resulting in numerous data-based ("big data" or "artificial intelligence") startups and new business models claimed to be built on "data network effects". It is usually believed that more data leads to stronger data network effects, but this is often not the case. Data network effects are more misunderstood, much rarer, more difficult to establish and even harder to recognize than "traditional" network effects.

4 May 2020

Why Marketplaces Fail: The Role of Engagement

Why Marketplaces Fail

So far, I have discussed a handful of characteristics that create structural advantages or risks for marketplaces. This includes the geographic range of network effects, supply differentiation, SaaS integration and market fragmentation. Fragmentation is most useful as a first level filter to assess the viability of any marketplace, while the rest are second and third-level screening frameworks to evaluate defensibility and scalability. Another factor that influences the potential of marketplaces is the nature of engagement, i.e. the size and frequency of transactions. While this is less influential than other structural characteristics, it can become a major risk factor for some types of marketplaces.

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20 Apr 2020

Zoom's Achilles Heel

Zoom vs. Slack

Over the last couple of months, Covid-19 and subsequent lockdowns have led to a dramatic shift towards remote work tools. Zoom has been one of the biggest beneficiaries of this shift, with daily active users growing from 10M in Q4 2019 to a staggering 200M in Q1 2020. This has also led to a surge of investor and startup activity in the remote work space. As a result, I have received numerous  questions about Zoom, from both investors and entrepreneurs. These questions largely boil down to "How strong are Zoom's network effects?". While this is an interesting topic to explore, it is the wrong question. The right questions are: "Does Zoom have network effects? And if not, what makes it defensible?".

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8 Apr 2020

Fragmentation & Network Viability

Fragmentation & Network Viability

In my last few posts, I have put across a screening framework for network effect-based startups based on defensibility and scalability, and also explained how SaaS integration can change those assessments. Before evaluating any of that, we have to first determine the viability of developing network effects in the first place. In order to do that, we not only have to evaluate the strength of the value proposition, but also the fragmentation of markets that the network or marketplace aims to connect.

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23 Mar 2020

When Networks Meet SaaS

When Networks Meet SaaS

Software-as-a-Service (SaaS) startups are extremely popular with investors for a host of reasons. SaaS startups are extremely scalable because software has zero (or near-zero) marginal costs once developed, i.e. it costs virtually nothing to create another copy. Combining this scalability with subscription-based pricing results in a revenue model with high gross margins and predictable revenue (ignoring AI and data processing heavy models for now). In addition, many B2B SaaS startups are also fairly defensible because they benefit from high switching costs, i.e. those that are a “system of record” become “embedded” in the day-to-day operations of their customers’ businesses which makes it difficult for competitors to displace them.

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9 Mar 2020

The Network Matrix: Bridges & Identity

Network Bridges

As I explained in my last post, the “marketplace matrix” is a great framework to get a quick understanding of the strengths and weaknesses of marketplace startups. Combining both defensibility and scalability of unit economics gives us a more holistic, but not yet comprehensive, view of these businesses. Interestingly, the core tenets of this framework are not restricted to marketplaces and can be extended to other types of network-based businesses as well (1-sided, 2-sided or multi-sided networks). But moving from the subset of marketplaces to the superset of networks requires the introduction of new concepts. I’ll explain these by looking at some well-known names in the social media space, and then extend these ideas to other network-based business in far-flung spaces, from payments to online gaming.

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24 Feb 2020

Defensibility x Scalability = The Marketplace Matrix

In the first part of our marketplace thesis, I explained how we think about the geographic scalability of marketplaces, i.e. we prefer marketplaces where a given unit of supply is accessible to customers across borders as opposed to those where it is restricted to a small local area. We saw that marketplaces with cross-border network effects (e.g. Airbnb), created a lot more value for investors than those with hyperlocal network effects (e.g. Uber). In sports terminology, this is a view of the “offensive” side of the game. But we also need to study the “defensive” side to gauge how well marketplaces can defend themselves from competition and copycats at scale.

11 Feb 2020

Marketplaces & Scalability: Lessons from Uber & Airbnb

Uber and Airbnb are two of the most iconic companies from the last decade. Both companies created entirely new markets via a marketplace model and were originally considered to be part of the same “sharing economy”. Since then, their paths have diverged. While they were both wildly successful, Uber (and Lyft) required far more funding to create value than Airbnb did.

16 Dec 2019

Netflix's Napster Moment

Netflix has been the darling of technology investors for the past few years. Since early 2017, its overall subscriber base has increased by roughly 60%, as it more than doubled its subscriber base outside the US. And, in response, Netflix's stock price nearly tripled over this period. By now, the engine for its growth is well known, i.e. original scripted content exclusive to Netflix. Of course, as we can see in the chart above, this has also dramatically increased its cash burn. Netflix's stated strategy was to invest into original content to acquire users and then subsequently ease off these investments to reach cash flow break-even. But a lot has changed in the global video streaming landscape since this strategy was conceived.

29 Apr 2019

Uber's IPO and Local Network Effects

Uber Ridesharing Revenue

My writing has been inconsistent (at best) lately, but Uber's IPO seems as good a time as any to come out of hibernation. I have written about Uber's business model numerous times in the past and more often than not, I have defended its financial performance. My argument was that Uber's losses were caused by large investments into logistics infrastructure (largely fixed) that would then result in long-term revenue growth (and overtake costs). Uber seems to be using that exact same argument to position itself to investors. Uber's IPO prospectus finally shed some more light on its progress, but I was concerned by what I saw. It showed the scale of investments, but it also showed that Uber is no longer a high growth company.