Direct Benefit Effect in Venture Capitalism
When looking at potential investment opportunities, investors often look for some competitive advantage within the company they are investing. Within Silicon Valley, many venture capitalists consider “network effects,” or when the value of the product to one user depends on the number of other users, the Holy Grail of competitive advantages. Many highly successful companies, such as Facebook, YouTube and Craigslist are products of this highly valuable competitive advantage.
This is a prime example of the Direct Benefit Effect discussed in class. All these companies offered a service which benefited from the addition of new users, as they were primarily based off user-created content. In these cases, the more users creating content for the service, the more benefit for each additional user to be “a part of the crowd,” and use the service as opposed to a competing one.
http://www.businessinsider.com/network-effects-2011-5