It Sounds So 1999

I spent some time yesterday meeting with a couple of my portfolio company CEOs and was struck by something about our conversations. They were so 1999. In one instance we spent time talking about how to make the company's product more "viral." And in the other instance we spent time talking about how the "network effect" was going to give sales a boost.

Despite our internal discussion of the viral nature of the one company's product or the powerful network effects associated with the other, neither company would likely tout these attributes to potential investors, analysts, the press, etc. Both viral marketing and the power of network effects got a serious black eye from their strong association with the Internet bubble and its subsequent implosion. In the late 90's every VC pitch stressed viralness and network effects. Yet for the last 3 years or so, they have been dirty words and we haven't heard a pitch with them.

It seems to me that both extremes are silly. Viral marketing and network effects are real business phenomena with real business implications. It is possible to lower the cost of customer acquisition by designing your product to be easily shared and adopted by close contacts of your existing customers. And it is possible to lower your cost of sales by designing products that have greater value to the participants when everyone in an ecosystem is using that product and therefore those who have already adopted the product are incented to get others to participate by buying your product as well. But the phenomenon alone will not create a great business. A product with huge value when a network is established had better have big value when adopted alone as well, or it will never survive long enough to create the necessary network to have an effect. And just because a product is viral and spreads like crazy doesn't mean that there's a business model that works -- viral products tend to be free and free tends not to make money.

I suspect that some very big businesses will be built in the next decade or so, in no small part thanks to viral marketing and the power of network effects. But I also suspect that new terms will be adopted to describe these phenomenon in order to shed the negative connotations of the Internet bubble. A rose by any other name will smell as sweet.

Comments

[Brian Dear]

Totally agree. I'm glad to see a VC appreciates that "viral" and "network effect" are real phenomena and have real implications for businesses. The trick is, I suspect, to build a business model whereby pieces of the puzzle are highly viral and exploit the network effect, but once customers are on board, they find additional value beyond the freebies that got them there in the first place.

[John Woolverton]

Hmmm.

I used both "viral" and "network effect" in my plan, cause we leverage users as a way to spread the service, and because everyone benefits as more users join. Maybe I can get away with this cause we're playing in the Instant Messaging space (where the basic service is viral), or maybe I should come up with a new name for it. Any suggestions?