By clicking “Accept All Cookies”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts. View our Privacy Policy for more information.

How to Create & Measure Network Effects (Part 2)

Aurore Falque-Pierrotin
February 24, 2021

This article (Part 2) is a follow-up of an original post (Part 1) focused on defining network effects (nfx)and increasing returns how we understand it at Samaipata.

So hopefully we can all agree now that network effects (nfx) are precious, as a powerful source of defensibility and value creation. The real question then becomes: how to trigger them? And how to measure them?

How to create Network effects?

We’re big believers in the “node saturation strategy” (more on this here), such as what Facebook did with Harvard’s students or what Clubhouse did with Silicon Valley’s top tech leaders. Start with a niche segment and only expand once you’ve reached market dominance there. A focused go-to-market will allow you to trigger virality more rapidly and reach “liquidity quality”.

Yet, reaching this Minimum Viable Critical mass (i.e. the point from which nfx generally kick in, as defined in Part 1) could be challenging and an alternative strategy would be the famous “Come for the tool, stay for the network” coined by Chris Dixon. “The idea is to initially attract users with a single-player tool and then, over time, get them to participate in a network. The tool helps to get to initial critical mass. The network creates the long term value for users, and defensibility for the company”.

You’re basically leapfrogging the liquidity quality challenge. Good examples include Instagram that launched with a non-networked value proposition around photo filters or any SaaS-enabled marketplaces (e.g. OpenTable).

How to measure Network effects?

We look at 5 different groups of metrics to measure early signs of a potential for network effects in a business:

  • 1. Acquisition KPIs: as any network grows larger and its value to its users increases, it should become more efficient in acquiring new users. So we typically look at the evolution of your % of organic traffic, your % of “direct” or “network-internal” traffic, your % of referred users etc., which should go up.
  • 2. Engagement/retention KPIs: we are obsessed with those. It’s key for us to understand your users’ cohorts both vertically (i.e. the product or service is improving over historical cohorts) and horizontally (i.e. the users of the same cohort are more retained & engaged on the platform over time). To understand the quality of your user base, we distinguish between retention of first-time users (i.e. are people coming back to the platform?) and their engagement on the platform (i.e. when they come back, do they transact more?). We analyse cohorts on a blended basis and/or just looking at paid users. And we also typically check what’s happening with your power users.
  • 3. Platform KPIs: we are also very keen on the concept of Operating System and Share of Wallet. Ideally your “share of wallet” with either side of the transaction should be increasing as multi-tenanting (i.e. your users being active on other competitive platforms) should go down. We love businesses that are striving to become the Operating System of either their demand or supply side. Similarly, the platform’s match rate (e.g. drivers time utilisation) or sell-through rate (e.g. inventory turnover) should ideally go up gradually. And, finally, you should become less and less dependent on your top X sellers and buyers over time. More on this here.
  • 4. Monetisation KPIs: as a result of all the above, your pricing & bargaining power should increase as users’ willingness to pay should go up: even if at the beginning you could be subsidising demand or supply acquisition, you then can introduce more expensive subscriptions, listing fees, higher take rates, or other monetisation mechanisms.
  • 5. Unit economics: at the end of the day, what matters most are your unit economics (LTV:CAC & CAC payback), which should get better over time as a result of:
  • i) Your customer Lifetime Value (LTV) increasing: you’re able to extract more value from your customers (i.e. declining incentives that you need to offer to different sides of the marketplace, overall improvement in pricing power) for longer (i.e. better retention patterns).
  • ii) Your blended Cost of customer Acquisition (CAC) decreasing.

That being said, we invest at Seed stage in very early businesses. Most of the companies we analyse have only a few months of data so we’re fairly pragmatic in our approach! It’s obviously not a prerequisite for you to have sound unit economics when we invest; yet it’s key to show us that you think of your business in those terms and that you have a plan to make those unit economics work in the medium to long term.

What does the future hold for Network effects?

The “increasing returns” world is subject to lock-ins. Yet those lock-ins don’t last forever, and bears will say that Nfx seem less powerful than before: winner-takes-all markets are being attacked, as the recent developments in the food delivery industry reveal for instance. Nevertheless we believe that, on the contrary, Nfx are becoming more dynamic than ever: Nfx can mature and develop differently over time. And it seems that Nfx are currently changing faster than before.

So it’s key to understand the type of Nfx your company is experiencing, especially with regards to:

  • The true nature of your Nfx: if your Nfx appear to be asymptotic, then you need to deepen your value proposition by pushing on brand, customer loyalty etc. vs. immediate liquidity. It’s especially important to understand if your supply is homogeneous /commoditised (e.g. Uber) vs. heterogeneous/differentiated (e.g. Airbnb).
  • The quality of the new users you’re adding to your network (e.g. trolls vs. heavy contributors to the network): you need to invest in curation mechanisms to protect the discovery potential of your platform.
  • How immune are your Nfx to competition: it’s key to understand networks overlaps, switching costs and multi-tenanting.

We do believe that Nfx, and as a result platform models, are here to stay. What happened with the GameStop case, is a good example of how the crowd can leverage the nfx of platforms, those platforms being Reddit, Twitter, Robinhood, and other brokerage apps. New “anti-nfx” regulation might arise to limit this growing power of platforms, yet this event reveals that their impact can be huge and that is just the beginning.


At Samaipata, we are always looking for ways to improve. Do not hesitate to send us your thoughts. We strive to partner with early-stage founders and to support them in taking their business to the next level. Check out more ways in which we can help here or for all our other content here.

And as always, if you’re a European platform founder looking for Seed funding, please send us your deck here or subscribe to our Quarterly updates here.

Latest News

See also

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros elementum tristique. Lorem ipsum dolor sit amet, consectetur adipiscing.

Part 2 - How to work with your investors at early stages

One of our goals as investors is to help our portfolio companies be as successful as possible. As such, we see Investors Relations (i.e. the management of reporting documents, boards, and monthly calls) not only as a way to ensure legal compliance and our fiduciary duty to our Limited Partners, but also as a way to ensure information alignment between us and our portfolio companies.
Read more

Generative AI and FTX, The Buzz This Quarter

This quarter at Samaipata we dive into Generative AI and the downfall of FTX, we highlight snippets from our portfolio, current market conditions and writings from the Samaipata team.
Read more

Part 1 - How to work with your investors at early stages

One of our goals as investors is to help our portfolio companies be as successful as possible. In addition to financial commitment, we strive to be helpful. Typically, the more information you share with us, the better we are able to understand your business and give relevant advice. To us, communication is the only way to drive alignment.
Read more

B2B Sales: How to think about compensation for your B2B Sales team

Your product’s in place, your sales team (mostly) in place, now how do you add more fuel to the fire to really motivate your sales team? We’ve dedicated this episode to this juicy topic of how to think about compensation for your sales team, especially as your team scales. Get it right and it’ll be worth a million bucks (literally!) but if not, it can become a tricky trap to get out of.
Read more

Welcome Samaipata 3.0: Same, same but different. Backing founders who dare to better the world

After months of hard work and deep introspection, we are very excited to introduce you to our revamped brand and website.
Read more

Reinventing Partnerships Between Brands to Revolutionize the Way Ecommerce Acquire Customers

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Suspendisse varius enim in eros.
Read more