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Tech Unicorns and Network Effects

Today’s tech world is all being young, aggressive and cutting-edge. Every year there is a list of top 10 startups to watch, and yet few have made successful transition to the scale-up phase.  In this article, the author talks about the difficulty for tech “unicorns”, startups that are worth more than one billion, to scale up and survive in the market in the long run. The main problem, according to the article, is profitability. Despite of popularity and a descent number of user groups, tech unicorns can’t assure their investors of a payback that is equivalent to the investment they received.

In class, we had a discussion on network effects and tipping point. One common strategy adopted by small, new companies when they first enter the market is to get past the tipping point. Once a company gets past the barrier of network effects in the market from the other company, the momentum it has gained would keep pushing the company forward and acquiring more market shares. Companies have a variety of ways of implementing this strategy to get past the tipping point; some spend millions on marketing and advertising, while some give out high discounts and even offer initial users free access to their products. However, tipping point is just one of many barriers that tech startups have to overcome. How are they supposed to maintain the network effects and market shares while transitioning to a profitable business?As the article has mentioned, to protect an acquired monopoly, companies have generally four approaches:  creating barriers to entry, raising switching costs – the amount the users have to pay to switch to a competitor, taking advantage of network effects and economies of scale. Keeping low prices doesn’t seem like a good idea any more, if the company is looking for a lasting business model. However, raising prices would most likely push out the existing customers that the company just acquired in the initial round. For a tech “unicorn” in the market, unless the switching costs is high, it can easily lose the network effects it has on its users since the users are not willing to pay a huge amount to stay in the network.

Network effect can certainly benefit a startup on its way to the ultimate success. However, it can be easily weakened by a company’s attempt to profit and the rise of product cost. Market share and profitability are the two key factors that a tech “unicorn” has to balance in order to survive in a competitive tech world.

 

Sources:

http://www.newsmax.com/Finance/MeganMcArdle/mortality-rate-tech-unicorns/2015/10/27/id/699190/

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