Editor’s Note: Semil Shah works on product for Swell, is a TechCrunch columnist, and an investor. He blogs at Haywire, and you can follow him on Twitter at @semil
It’s no secret that many entrepreneurs and investors are seduced by the specter of network effects. Walk around any young company fine-tuning their product to fit their market or any early-stage investment committee meeting, and inevitably, network effects will be discussed. “How do we tweak the product to ignite a network effect?” “They’ve built a great product, but can it find a network effect to grow?” On the web, the right answers to these questions have created enduring global companies and handsomely lined many pockets. On mobile, we all knew — intuitively — that this would be the case, but perhaps we didn’t have a good sense of where the floor would be or how high the ceiling could rise. Now, as “The WhatsApp Effect” takes root, the picture is beginning to get clearer, and the result will impact early-stage tech entrepreneurship moving forward.
There are different kinds of network effects, but as it pertains to mobile software, this specific network effect is not just about how services improve as more people join — it’s also about the speed with which mobile software can proliferate and spread, with minimal friction, through various networks. Speed is critical, because quite often, these races can end in winner-take-all outcomes, and the minimization of friction is critical because it not only increases speed, but potentially reduces capital requirements to get there. When it comes to early-stage mobile products and the competitive environment to fund them (to a point), these elements are not only critical — they’re seductive. Mobile valuations will continue to rise, technical and design talent will continue to shift over to the mobile platform, more and more apps will build native messaging backbones into their products, and the competition for a mobile user’s attention and credit card will get even more intense.
This is “The WhatsApp Effect.”
We all now see the heights to which mobile software values can reach, with hits like Instagram, Angry Birds (and more recently, Flappy Birds), Uber, and now WhatsApp, and now more and more people worldwide are going to attack these categories and emergent opportunities in mobile gaming, transportation, payments, m-commerce, and much more. The opportunity here is so big, it’s like a “Voltron of Network Effects,” where mobile devices, mobile platforms, social graphs, address books, and applications themselves form a system where the whole is greater than the sum of the parts. It’s not always classy to admit, but the price of the WhatsApp deal matters greatly. Yes, the $19b number is better analyzed as what this particular product was worth to its acquirer, not the broader market, but like a fancy piece of real estate, market price is ultimately what the highest bidder is willing to pay. it doesn’t have to “make sense” to the rest of us.
In a global economy where capital is concentrated among a few, and where a good portion of that capital seeks high-growth opportunities, we can expect more and more activity now that investors of all stripes — from early-stage tech investors all the way to retail investors — see the allure of mobile software and the quick, stratospheric returns it can generate. And, as it becomes harder to identify who the winners in mobile will be, and as those winners require less capital to begin and maintain operations, the competition to invest in potential breakouts and winners will only intensify. We’ve already seen a bit of this with Snapchat going from venture capital to hedge funds in the span of a calendar year. The creator of Flappy Birds could’ve raked in a huge bounty and only paid a toll to device-makers for the access to the user network — he had no need for private investment. This is just the beginning.
Dating all the way back to the original telephone all the way up to influential global companies like Microsoft, Google, Facebook, LinkedIn, and Twitter, among others, the dream of network effects is to create value for users by adding more users to the service. These products often empower users to send and receive packets of information, in various forms, from something as complex to private payment keys to as simple as a text message inside WhatsApp. Eventually, networks can grow so large as to confer lock-in, where the software traps the user into its experience and creates a barrier to entry for competitors. This is the dream for mobile app makers, too, to harness the combination of these massive network effects and have their software spread faster than has ever been possible.
However, we should remain cautious, too — the recent $19b representation of what mobile network effects can generate will intensify interest in the category, but mobile discovery and distribution still present serious hurdles, and while the number of mobile users coming online will continue to rise, these users’ hours per day will not increase. I don’t mean to imply there won’t be terrific opportunities for SaaS products or other infrastructure or enterprise IT products and services, but when it comes to reaching consumers en masse and looping them into a network effect product, the market has confirmed what we’ve known all along — that we are all building and investing into a platform that can reach heights we may have never seen before. That, to me, is “The WhatsApp Effect,” and there’s no turning back now.
Photo Credit: Tim G. Photography / Flickr Creative Commons