The network effect is one of the most powerful phenomenons in modern day business. This phenomenon happens when a product or service becomes more valuable as more people use it (i.e. Facebook or Linkedin). The network effect, by its definition, becomes exponentially more beneficial with each new customer. In today’s world of tech startups, the network effect is sometimes chased with more fervor than revenue growth or profitability.
A lot of companies today focus on growing their user base with the aim of becoming acquisition plays, and although they won’t admit it, they may never actually turn a profit before being acquired. Even though these types of plays have worked in the past – just look at Instagram – it causes an internal network effect within these startups and among their employees that individuals should be aware of.
Let me break away from the internal network effect for a second and validate the allure of working on the ground floor of a startup or growing business. I totally get it. There is excitement and innovation all around you, not to mention you are working with some of the brightest and most ambitious people the world has to offer. There is a feeling of camaraderie between employees and a sense that together you will break down barriers.
As a company grows and new employees are brought on, this allure grows exponentially. The allure to become a part of this growing network becomes the internal network effect. A sense that I get from many people and aspiring entrepreneurs is that more employees and more company perks means a more successful business and a network that you should strive to be a part of. Sadly, not so. A lot of these companies aren’t even turning a profit, yet have catered lunches and a company gym. Well, if they have catered lunches, company amenities, and fun employees, this would be a great place for me to work, right? Again, not necessarily so.
It may start sounding like the saying “don’t jump off the bridge just because everyone else is doing it,” and in reality, it is. Just because a company is growing its internal network of employees and perks doesn’t mean it’s something you should be a part of, even though the internal network effect is making it ever so enticing. Both current and potential employees of growing businesses should really look at a company in its entirety and not just at its shiny exterior. You should ask yourself: What are the long-term goals of the company? What is the vision of its leadership? What is the business’ driving purpose?
Just because everyone else is leaving their jobs and joining this fun startup isn’t validation that the company is successful and that you should join too.
I mention the internal network effect as a cautionary tale because I’ve seen a lot of bright companies collapse on themselves and, in turn, collapse on their loyal employees. Just the other day I was speaking to a friend of mine who was telling me about his background. A graduate of UCLA, he worked for a startup right out of college in the LA area. The idea was unique enough to work – they were trying to become the AARP for twenty somethings – and they had a lot of bright people on board. The company was a fun place to work he told me, and with each new hire the company’s internal network effect made it harder to leave.
Unfortunately, the business just wasn’t meant to be. Although the shiny exterior made it look like a place anyone would want to work, on the inside they were failing. My friend told me he didn’t even get paid the last 3 months of his employment before they officially folded. And with that, he was out of a job.
Could he have seen the writings on the wall? Did he have such a passion for the business that he wanted to stick with it until the end? Maybe. The point I’m trying to make is to not allow yourself to be blinded by the internal network effect of a company.
As a company grows and adds fun people, a free cafeteria, and a basketball court, make sure that you aren’t basing your opinion of that company on those facts alone.