Gurley told OpenTable CFO they would reach 99% market share, not 17%, due to network effects understanding.
“And he said, oh, no one gets more than 17% market share, all the businesses I've worked with. Because I believed in network effects, I was like, we're gonna get 99.”
Gurley learned from Bill Miller that network effects justify Amazon growing at unreasonable rates for extended periods.
“value just means that the asset is underpriced relative to what you think it will be worth in the future.”
Gurley says OpenTable had the most intellectual appeal because Benchmark invested at three restaurants with a network effect thesis.
“The one that had kind of the most intellectual appeal was probably OpenTable because we invested when there were three restaurants on the network and had a theory that a network effect could take place where it could tip towards winter, take most.”
Gurley explains OpenTable unlocked parametric search for restaurants that was previously impossible without calling each restaurant individually.
“Before OpenTable, you could not do that. You'd have to call each one of them, and so it unlocked a consumer value proposition that didn't exist.”
Gurley cites CrowdStrike as example of network effects in enterprise security through shared threat intelligence across customers.
“But they posted a memo four years ago titled the CrowdStrike Security Cloud Network Effect.”
Gurley explains CrowdStrike's network effect where threat-sharing makes the largest security network most valuable.
“the way that it worked for them and the way that the marginal customer ends up with more utility is if the threats are shared across a network, then if you belong to the biggest network, then you get the shared learning of everyone in that network, which lowers your threat exposure.”
Gurley recalls OpenTable's CFO wanted to quit because his model capped market share at 17 percent.
“And one day I showed up early for a board meeting and and the CFO comes to me and he says, Bill, I'm I'm gonna quit.”
Gurley would bet on a 500 million user communication platform adding avatars over a perfect avatar system without users.
“if I had to place a bet on whether someone that had 500,000,000 users on a digital place platform where people are communicating and that they might add avatars or some digital thing that makes it more immersive versus someone that built the perfect digital three d avatar immersive system but doesn't have the users yet?”
Gurley argues network effects decay as platforms scale, citing LinkedIn as an example of diminishing marginal value per user.
“Like what's the value of an incremental member joining LinkedIn? It's probably less than what the value of the 10,000 person that joined LinkedIn.”
Gurley argues Apple and Google don't know how to build UGC communities because it requires specific expertise.
“And it turns out the majority of people don't know how, including really large companies like Apple and Google because it's really hard and it requires a lot of hand holding and hand stitching and building in place a network effect where the atoms start to bounce into one another.”
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“And it turns out the majority of people don't know how, including really large companies like Apple and Google”