[What happens to network effects when they cross the border?]
It often seems that startups with solid network effects are nearly unstoppable. When a network reaches critical mass, it seems like an inevitability that the company will dominate as the ever-increasing value it provides is recognized by more and more users.
What happens when the company, growing exponentially, decides to dive into another market? In many cases, the market entry is not met with a big splash, but a small drop. The company receives no credit in the new market for their valuable network at home. Many startups acknowledge that they need to build up a local network, but they differ their approach in the new market. They attempt to build up the new network by simply creating awareness and throwing marketing dollars at the network. This differs from their original home market approach, where they identified a core group of users and focused on building out the network for this group.
But often, there’s no shortcut and the network often needs to be built up from scratch. Yes, the startup does have some advantages with product development and takes a lot of learnings to the new market, but the approach should not be to stand on the shoulders of the home market. They should build it up the old-fashioned way.
Not all network effects are created equal here. In forums, a network where content is key, the language will play a key role in how portable the network effect is. A Taiwan-based forum, with content in Chinese, will have an easier time expanding into Hong Kong than Japan. Unlike a Hong Kong user, a Japanese user will see nothing of value, so the company could focus on building up the Japanese network from scratch by starting out with one small, core group.
Airbnb, initially focused on the US, easily found hosts internationally who were eager to serve traveling Americans. As hosts came onto the platform in international markets, domestic travelers in those markets followed.
Clubhouse, of course, was able to simultaneously enter many markets by offering must-hear content like Elon Musk grilling Robinhood villain Vlad Tenev, which had global appeal, to their platform and maxing out FOMO. Long after Musk and other stars made their appearances, mere mortal users still remain to chat amongst themselves.
Facebook, initially full of English content and Americans, faced an uphill challenge to onboard networks in non-English speaking countries and foreign countries. The arrival of FarmVille, a game that spoke to users of every language, pulled new users onto the platform. Before long, there were plenty of non-English speaking friends on Facebook.
When network effects travel across the border, your mileage may vary. Some startups will have a much better time replicating their success in new markets. Others will find success only by being innovative or carefully selecting markets. And others still will find no shortcuts and methodically build from scratch. Which one are you?
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