December 7, 2022 • 24 mins
In Web3, network effects are fundamental and critical to survival. If you’re building in Web3 properly, then it should automatically include network effects. Listen in as General Partner Morgan Beller acts like the river guide of network effects for Web3 as she shares her experience and insights on how to be defensible in this new world. Eventually, we will see Web3 swallow Web2 - look how much we’ve learned since that white paper for BTC arrived in 2009. Founders on the frontlines of the Web3 world are educating us on how to remain defensible and retain growth amongst competitors.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
You're listening to episode 9 on networkeffects in web 3 from the network effects
(00:03):
master class Pete on the NFX podcast.
In web 2, network effects were nice to have ascompanies scaled and carved out their section
in the business world, but now they're moreimportant than ever.
You'll hear NFX general partner, Morgan Beller,uncover why in web 3, network effects
fundamental and critical to survival.
You also get a brief history of the evolutionof the web and our 3 stage framework for
building a startup in the world of web 3.
(00:25):
Let's jump in.
I'm Morgan Beller, and I'm a general partner atNFX.
Prior to NFX, I was at Facebook where I was acocreator of the DM project formerly known as
Libra, which was Facebook's cryptocurrencyeffort.
And a life before that, I was at AndreessenHorowitz where I looked at some crypto deals
(00:45):
around 2013 2014.
So I've been in and around this world that wenow call Web 3 for the better part of 8 years.
Now that I'm at NFX, I meet with web 3founders, and we talk about the power of
network effects and how network effects were.
Nice to have in web 2, but really, really needto have in web 3.
In this section, we're going to go over severalareas.
(01:08):
1 is we believe that web 3 founders andcompanies need to be built in almost this
inverted way.
So as discussed, outside the map, there's thesocial aspect, and we believe that Web3
products start there.
Like growing your Discord, growing yourcommunity, and then bringing the product
towards the inside of the map.
So we'll talk about that inverted path.
Then we'll talk about our 3 stage framework forearly web 3 founders.
(01:32):
Then we'll start with my experience atFacebook, the strongest case study for network
effects in web 2, and how those learninglessons relate to my job and early stage
founders today.
And lastly, how Ethereum also has someparallels to everything that we've talked about
in this section.
Not to be too corny about it, but we seeourselves as kind of being the river guides for
(01:53):
web 2 founders trying to find their way intoweb 3, but also for web 3 founders trying to
apply lessons from the web 2 network effectsworld to web 3.
So with that, let's get started.
If you're new to web 3, welcome.
I was first introduced to crypto, which is whatit was called at the time, in 2013, when I was
(02:16):
at Andreessen Horowitz and biology Srinivasanjoined, and he was preaching crypto left,
right, and center.
I listened and I went on walks with him, andI'm really grateful for that learning
experience, but admittedly, I was too dumb thento fully get it and dedicate my life to it.
So if you're new, welcome, it's still reallyearly.
And one way to think about web 3 is relative toweb 2 and web 1.
(02:41):
So most of the world was introduced to web 1around Morgan, and it was read only.
You could consume the internet.
You could not, I mean, very, very few peopleactually contributed to what was read on the
internet.
Then around the 2000s, you had platforms startto emerge that were read and write.
So you could consume content, but you couldalso create content.
(03:01):
You could write a blog.
You could post on Facebook.
You could do a tweet.
And now, web 3 is this concept of decentralizedownership of all of these platforms.
And that's kind of the big unlock.
So whereas web 2, you maybe would read onTwitter, write on Reddit, but you didn't
necessarily have ownership in those platforms.
(03:22):
Maybe you own some Twitter shares, but that'sdifferent, and we can talk about it.
But in Web 3, the creators are also theconsumers, but are also the owners of these
products and platforms, and that changes thewhole dynamic.
Are my definitions of Web 3 and effects, ofcourse, we created our own.
So our definition of Web 3 is any product thatequalizes ownership and participation across
(03:47):
the consumers and creators of products andplatforms.
Alongside our definition, there's also thisethos of web 3.
And by the definition of distributing the senseof ownership and participation, the ethos is
also this shared sense of ownership in that notonly do you tactically own a piece of these
(04:08):
protocols, but in virtue of doing so, you alsofeel like a real owner and contributor to the
products and the protocols and the platformsthat you interact with.
So you engage differently.
You tell your friends to join differently.
You care differently.
So that distributed sense of ownership andparticipation really is pervasive across how
(04:33):
you feel interact and share that product aswell.
If you are a founder, thank you for being here.
We largely see 2 buckets of founders in web 3.
Let's start with the first.
First is web 2 founders We're really excitedabout building in web 3.
(04:54):
So these are founders that come from moretraditional web 2 companies with strong product
and engineering backgrounds.
They have been following Web Pete for a whileor are very new to it, and they have the mental
virus, which we are all familiar with.
And they just need to have their next act beingweb 3.
We are very excited about this wave of founderscoming into web 3 because that the product
(05:18):
standard in Webb 3 is the equivalent of eatingglass products are really hard to use.
Us, crypto folk have use them because we haveto and because for the love of the James.
But for the next wave of consumers to enter thespace, the product experience needs to be
better than where it is today.
(05:38):
So these web 2 founders who are coming in, theyhave years of experience building some of the
products that millions of not billions of, youknow, normal people use every day, and we're
really excited to see how they can apply thoseskills to web 3.
That said, web 2 founders that are new to web3, the biggest risk is platform risk.
So if you're building a web 2, there's littleor smaller platform risk than building a Web 3
(06:05):
in that.
If you are choosing to build an iOS app whereyou're choosing to build even just a website.
Like, there's little platform risk.
Like, you're pretty confident that iPhonesaren't going anywhere for the foreseeable
future.
In web 3, you need to choose which island tobuild on.
So which protocol to build on?
(06:26):
Which blockchain chain to build on, which layer1 or L1 to build on.
And there is risk there in that there's risk tothe underlying token price.
And what does that mean for your product?
There is risk to the underlying infrastructure.
And what does that mean for your product?
So there isn't one answer, and we are not hereto pick favorites.
And we do believe that there are differentanswers for different use cases and different
(06:49):
founders, but I would say the most importantdecision to make as far as, like, the start of
your journey and on the decision tree is whichprotocol you're going to build on.
Can actually, let's say, pause and rewind inthe most important decision to make of which
problem are you gonna solve for people orconsumers or end users.
And then what is the best architecture andinfrastructure to help you achieve that goal?
(07:15):
Because as mentioned before, there isn't oneanswer.
There are some islands, blockchains that arebetter Morgan certain use case, and there's
some that are better for other use cases.
So figure out the problem.
That you can uniquely solve.
And then the biggest choice from there is whatisland are you going to build on.
And the reason why it's so important is for thereasons I mentioned before, infrastructure of
(07:39):
what that will impact your product and businesstoken price will impact your product and
business.
And then also it is the community and theinfrastructure that is built around that
island.
So Morgan instance, like some Blockchains aresupported on a lot of exchanges.
Some blockchains are supported on fewerexchanges.
Some have more on and off ramps, meaning it'seasier for consumers to get fiat money US
(08:04):
Beller, euros into and out of those.
So there are all of these ancillary ecosystembenefits or disadvantages to various
blockchains.
And the most important decision you can makeonce you figure out what you wanna do is which
blockchain are you going to build on?
One of the most important heuristics toevaluate those blockchain through is the
network effects lens.
(08:25):
So we will be putting something out that willevaluate various blockchains through various
network effects, lenses, and Stay tuned forthat.
The second bucket are the web 3 founders thatare native to web 3.
So you have Pete, slept, and breathed thisworld for the past.
(08:49):
You don't even remember life Morgan, and welove you too.
And we are so excited to work with you as well.
So you are kind of rolling your eyes at what Isaid in the last section.
You know the ecosystem.
You are very familiar with the pros and cons ofthe various blockchains, but We believe that
there are some learning lessons from the beforetime that are still relevant to you.
(09:10):
We recognize that Web 3 is this whole newworld, and that a lot of the mental models from
web 2 and earlier do need to be thrown in thegarbage because they do not apply.
But we also believe that there are commondenominators from the before times that are
still relevant.
And, of course, that includes, like, thenetwork effects framework.
So we will be talking about that today as well.
(09:32):
I'll also add that my partner, Gigi, has amental model for types of businesses in Web3.
And he says that there's 3 types of businessesin web 3.
1 are kind of the completely net new products.
So I think L1s, which the old world doesn'tapply.
They are valued and who knows how.
And they have James, and they have cultfollowings, and they are religions, and they
(09:56):
are wonderful, and it's hard to or harder toapply mental models from the before times to
those.
Then the second bucket is products that are netnew to web 3 and that they could not have
existed Morgan.
And everything about them is Web 3 native, butthey are still grounded in some reality and
(10:16):
that maybe they still have an equity evaluationversus a token valuation, something else we can
talk about.
And maybe they also have to acquire users insimilar ways.
And then the 3rd bucket are web 2 businesseswith web 3 sex appeal.
I'm allowed to say that, which are businessesthat are still really traditional businesses in
(10:36):
that they are still based on transactionvolume, or they still have to by Facebook ads,
or they still have to do enterprise James.
Like, a lot of the inner workings of how thesecompanies will be built and how they will
succeed are really the same as they were, butwhat they're selling is a product that touches
the web 3 world in some way.
And those products and founders really need tostudy lessons from the before times.
(11:02):
So we work with teams in all three buckets, andwe are excited about all three buckets.
For the 3rd bucket, I would say that thecaution is thinking that those businesses are
maybe more net new than they are.
Now that I've been at FX for a long and a short18 months, I've met with 100, if not thousands
(11:24):
of web 3 founders, and I've realized that thereare these common denominators if you wanna
build network effects into your business.
So With that, we've developed a 3 partframework for how to Beller network effects
into your business.
Stage 1 of the framework is network binding.
Network of bonding is really important.
You need to start with your community.
(11:46):
You need to start with the people that you'resolving a problem for, and you need to talk to
them.
So instead of building in a vacuum and thengoing out into the world and hoping that the
users exist and that they want what you'reselling them, we believe you need to invert it
a bit, which is start with the people thatyou're solving a problem for, but not only
that, because that's always been Morgan.
(12:08):
Start engaging with them sooner and having themengage with you sooner.
So I recognize that animal farm didn't work andthat there's a spectrum Pete.
And we still believe that there does still needto be some team that is building and making
decisions and using their judgment at the sametime, we believe that instead of that team kind
(12:28):
of being off on their own and then coming upfor air when the time was right to launch the
products that That team needs to be engagingwith the people that they're solving a problem
for Currier, meaning specifically that ask themwhat they want, ask them what features they
want, ask them, what they're looking to see inthe product on day 1.
(12:49):
And to the point that there's a spectrumbetween complete dictatorship and animal farm,
I would say maybe make a finite list of whatare the parameters in your product that you're
comfortable letting the community have controlover or letting the community have some say
over and let them play kind of in that sandboxbecause it would, of course, be chaos if you
(13:11):
opened up the whole scope for the whole world,and that's why there are people who are product
managers and there are people who are engineersand there are experts at certain things.
But you do want your community to feelownership.
And specifically, like, the litmus test that Iuse as a proxy is, does your community, does
your user base feel and know that the productlooks and feels and is different because of
(13:32):
input that they had.
And, again, whether or not that's true, itshould be true.
It's very important that they feel that waybecause coming back to the ethos part of web 3,
you want the people you're having a problem forto feel like they are really owners.
But one of the more common ways of networkbonding and crypto that we see is tokens.
So Tokens are interesting because they are autility that is unique in how democratic they
(14:01):
are.
And by that, I mean that in the past, therewere different tools used to incentivize
different parties related to a business.
So you are Facebook to use them Morgan.
And you pay your employees with cash, and youalso pay them with equity grants, and you pay
your contractors with cash, but those are in ofcontracts, but you also have stock that public
shareholders can buy.
(14:22):
And there's various forms of compensation thatcan be used to coordinate the parties in your
ecosystem.
In crypto, that is democratized and thatthere's one unit, and that is your token.
The value of that token is tied to the healthof the product or the protocol.
So when the product and protocol is doing,right, or is doing well, the value of the token
(14:44):
goes up.
And, again, if used as a tool, anincentivization tool, then you have all of the
various constituents in your world, customers,employees, contractors, partners incentivized
to make the token go up, which, again, isincentivize to make your business and protocol
healthier.
(15:05):
So as we keep saying, we believe that thesocial network effects, the ones on the outside
of the map, are the extra important ones forweb tree founders as far as where to start.
And I'm realizing that it's worthwhile to pauseand go over what those social network effects
are.
So the social network effects are tribalBeller, bandwagon, and language, and let's go
(15:27):
through each one.
So tribal is finding your tribe, finding groupsof people who share a common interest, whether
that's baseball cards or Morgan credits, orArizona ID.
Once you find those people, the beauty is thatit's no longer one to no longer you trying to
find those people, it becomes money, and thegrowth then becomes exponential.
(15:50):
And your tribe helps instill the second networkeffect, which is the belief network effect.
So the belief network effect is much like goldand religion, and Bitcoin, which we will get
to.
And the belief network effect is creatingshared beliefs among a group of Pete, so that
they are motivated to achieve a common goal.
And once more people start to believe in thesame thing, the value of that belief rises.
(16:13):
The bandwagon network belief is more or lesscreating FOMO, creating something that feels
exclusive that the people on the outside wantto be a part of.
And that the people on the inside feel reallyspecial to be a part of.
And then last but not least is language.
And language isn't the most important.
It's not like you can't start without it.
(16:34):
But it's a very, very nice to have.
And language is this subculture that peoplewanna be a part of.
And you see it between projects, but you alsosee it at crypto at large.
Like, if you saw people saying g n for goodMorgan, or if you see people spelling when WEN
instead of WEN.
Those are all of the little things that createthe shared language and the shared subculture.
(17:00):
Between a group of people, which makes it feelmore like a tribe.
So even though those are 4 distinct networkeffects, you can also kind of see how the 4
social network effects play together.
And build on each other and can kind ofsnowball.
It's definitely something you should beshooting for.
So the 2nd phase is once you have your socialnetwork effects in place or a good enough
place.
(17:20):
The real challenge is that how do you navigateyour team, your product, and your tribe closer
towards the center of the circle?
So social network effects are great and strong.
And again, where we believe web 3 foundersshould start, but the trick is that the
strongest network effects are actually in themiddle.
So as you figure out where you're going to landin that center, think of some examples.
(17:41):
Are you a platform like Ethereum where you arebringing developers to bring DApps and products
experiences on top of your platform.
Are you a marketplace?
Like OpenSea where you have buyers and sellersand you're at the center of that, or are you a
market network where you have end size of yourmarketplace, which make it even stronger
(18:01):
because there's more constituents that are tiedto your success.
The goal of stage 2 is navigating towards thecenter of the circle to find a more defensible
position and landing place for your company.
Stage 3 is reinforcement.
So once you have your social network effectsand once you've chosen your network effect,
that's more towards the center.
How do you reinforce that?
How do you build defensibilities ofdefensibilities?
(18:23):
How do you build Beller the walls of yourcastle even higher?
How do you further ensure then it's harder tocompete with you.
It's harder to replace you.
It's harder to make you irrelevant.
Reinforcement is an area where web 3 isparticularly awesome.
So in web 2, reinforcement, the onus was on thecompany, the onus was on the founder, to
(18:45):
continue to build those defensibilities ondefensibilities.
In Webb 3, if done right, and that's why thesocial network effects are so Morgan, but you
have a tribe working for you.
And it's kind of the self fulfilling prophecywhere not only are you and your direct team
working on the reinforcement and the defenseabilities on defense abilities, but you have a
(19:07):
tribe that has a belief system and a sharedlanguage that's out there kind of processes
into the world, the power of your product andyour platform, and incentives aligned are
aligned across all constituents of yourcommunity to continue to reinforce these
network effects.
And instead of it being, you know, one to manyMorgan centralized team to many in this effort.
(19:31):
It's many to many, and that's where even thereinforcement growth can be exponential.
If you set the social network of X buildingblocks in place correctly from the beginning
and nurture them over time, And that's why tobring this full circle, we really, really
believe that starting there is importantbecause if you sew those seeds early, it kind
(19:55):
of just continues to pay off for years years tocome, and we'll continue to build that Pete for
you which will make your life easier later.
So invest the time early to build the socialnetwork effects that later when you're at the
reinforcement stage, you have a whole army ofpeople working for you with you.
(20:16):
So if you're starting a web 3 company, werecommend following this 3 stage framework.
To build defensible network effects strategyinto your business from the earliest days.
As we try to tie in these DM learning lessonsover the course of this course, One that I'm
(20:38):
reminded of is how we really took that web 3ethos to heart.
So we knew that we were maybe the ones comingup with the initial idea behind at the time it
was called Libra, but we also knew and feltdeeply and strongly that Libra had no chance of
success if we didn't make others not only feellike they were owners, but actually also be
(21:00):
owners.
So almost on day 0, we went to recruit otherorganizations, individuals, and entities to be
part of the labor process from the earliestdays so that everyone felt a sense of ownership
and so that it didn't feel and so that it notonly that it didn't feel, but so that in
(21:20):
reality was not owned or controlled or birthedor conceived by 1 centralized entity.
And that was really important to Morgan.
Kind of every step along the way.
We kept pausing and checking ourselves andsaying, is this truly a process that is not
owned and controlled by us?
Is this truly a community that we're buildingwhere everyone feels like Libra is as much
(21:45):
theirs as it is ours?
And is this truly a product that can stand onits own without us?
And that's one of the really important litmustests to ask for any Founder and Web 3.
Like, of course, there's gonna be a phase whereyou're needed and you're wanted, but an
ultimate goal is to envision a future where oneday if you were to disappear, can that product
(22:07):
or protocol live on its own?
And that was always something we askedourselves every second and every day over the
labor journey.
If you've made it this far, thank you.
And you also have heard and hopefullyunderstand why we believe network effects are
so important for web 3 starting from socialnetwork effects to more of a center of the
(22:32):
circle of what is the main network effect ofyour business.
But at the same time, I'm gonna admit we don'treally know anything in that.
It's so early.
And if you're new to web 3, I don't want thisto be intimidating, but I also really want you
to feel that it's so early.
And you hear people say that, and you mightthink it's a joke, but it's true.
And as my partner, James has been following andstudying and building and learning in the web 2
(22:56):
world, He has discovered new network effectsfrom the web 2 world as web 2 has evolved, such
as the hub and spoke network effect.
So although we're here today, preaching what weknow.
We also are very cognizant of the fact that wedon't know a lot, and we expect to discover new
network effects that are specific and relevantto web 3 as the space emerges and as web 3 eats
(23:19):
web 2.
So if you enjoyed this course, please staytuned and subscribe and join the NFX family so
that you can learn and discover with us as thisworld evolves.
Stay tuned to the NFX podcast as we'll post 1episode per week until we complete the course.
Can also watch this entire master class onlineatnfx.com/masterclass, where you can log in,
(23:45):
track your progress, and watch full videos,retranscripts, and find other related material.
Thanks for listening to the NFX podcast.
You're listening to episode 9 on networkeffects in web 3 from the network effects
(00:03):
master class Pete on the NFX podcast.
In web 2, network effects were nice to have ascompanies scaled and carved out their section
in the business world, but now they're moreimportant than ever.
You'll hear NFX general partner, Morgan Beller,uncover why in web 3, network effects
fundamental and critical to survival.
You also get a brief history of the evolutionof the web and our 3 stage framework for
building a startup in the world of web 3.
(00:25):
Let's jump in.
I'm Morgan Beller, and I'm a general partner atNFX.
Prior to NFX, I was at Facebook where I was acocreator of the DM project formerly known as
Libra, which was Facebook's cryptocurrencyeffort.
And a life before that, I was at AndreessenHorowitz where I looked at some crypto deals
(00:45):
around 2013 2014.
So I've been in and around this world that wenow call Web 3 for the better part of 8 years.
Now that I'm at NFX, I meet with web 3founders, and we talk about the power of
network effects and how network effects were.
Nice to have in web 2, but really, really needto have in web 3.
In this section, we're going to go over severalareas.
(01:08):
1 is we believe that web 3 founders andcompanies need to be built in almost this
inverted way.
So as discussed, outside the map, there's thesocial aspect, and we believe that Web3
products start there.
Like growing your Discord, growing yourcommunity, and then bringing the product
towards the inside of the map.
So we'll talk about that inverted path.
Then we'll talk about our 3 stage framework forearly web 3 founders.
(01:32):
Then we'll start with my experience atFacebook, the strongest case study for network
effects in web 2, and how those learninglessons relate to my job and early stage
founders today.
And lastly, how Ethereum also has someparallels to everything that we've talked about
in this section.
Not to be too corny about it, but we seeourselves as kind of being the river guides for
(01:53):
web 2 founders trying to find their way intoweb 3, but also for web 3 founders trying to
apply lessons from the web 2 network effectsworld to web 3.
So with that, let's get started.
If you're new to web 3, welcome.
I was first introduced to crypto, which is whatit was called at the time, in 2013, when I was
(02:16):
at Andreessen Horowitz and biology Srinivasanjoined, and he was preaching crypto left,
right, and center.
I listened and I went on walks with him, andI'm really grateful for that learning
experience, but admittedly, I was too dumb thento fully get it and dedicate my life to it.
So if you're new, welcome, it's still reallyearly.
And one way to think about web 3 is relative toweb 2 and web 1.
(02:41):
So most of the world was introduced to web 1around Morgan, and it was read only.
You could consume the internet.
You could not, I mean, very, very few peopleactually contributed to what was read on the
internet.
Then around the 2000s, you had platforms startto emerge that were read and write.
So you could consume content, but you couldalso create content.
(03:01):
You could write a blog.
You could post on Facebook.
You could do a tweet.
And now, web 3 is this concept of decentralizedownership of all of these platforms.
And that's kind of the big unlock.
So whereas web 2, you maybe would read onTwitter, write on Reddit, but you didn't
necessarily have ownership in those platforms.
(03:22):
Maybe you own some Twitter shares, but that'sdifferent, and we can talk about it.
But in Web 3, the creators are also theconsumers, but are also the owners of these
products and platforms, and that changes thewhole dynamic.
Are my definitions of Web 3 and effects, ofcourse, we created our own.
So our definition of Web 3 is any product thatequalizes ownership and participation across
(03:47):
the consumers and creators of products andplatforms.
Alongside our definition, there's also thisethos of web 3.
And by the definition of distributing the senseof ownership and participation, the ethos is
also this shared sense of ownership in that notonly do you tactically own a piece of these
(04:08):
protocols, but in virtue of doing so, you alsofeel like a real owner and contributor to the
products and the protocols and the platformsthat you interact with.
So you engage differently.
You tell your friends to join differently.
You care differently.
So that distributed sense of ownership andparticipation really is pervasive across how
(04:33):
you feel interact and share that product aswell.
If you are a founder, thank you for being here.
We largely see 2 buckets of founders in web 3.
Let's start with the first.
First is web 2 founders We're really excitedabout building in web 3.
(04:54):
So these are founders that come from moretraditional web 2 companies with strong product
and engineering backgrounds.
They have been following Web Pete for a whileor are very new to it, and they have the mental
virus, which we are all familiar with.
And they just need to have their next act beingweb 3.
We are very excited about this wave of founderscoming into web 3 because that the product
(05:18):
standard in Webb 3 is the equivalent of eatingglass products are really hard to use.
Us, crypto folk have use them because we haveto and because for the love of the James.
But for the next wave of consumers to enter thespace, the product experience needs to be
better than where it is today.
(05:38):
So these web 2 founders who are coming in, theyhave years of experience building some of the
products that millions of not billions of, youknow, normal people use every day, and we're
really excited to see how they can apply thoseskills to web 3.
That said, web 2 founders that are new to web3, the biggest risk is platform risk.
So if you're building a web 2, there's littleor smaller platform risk than building a Web 3
(06:05):
in that.
If you are choosing to build an iOS app whereyou're choosing to build even just a website.
Like, there's little platform risk.
Like, you're pretty confident that iPhonesaren't going anywhere for the foreseeable
future.
In web 3, you need to choose which island tobuild on.
So which protocol to build on?
(06:26):
Which blockchain chain to build on, which layer1 or L1 to build on.
And there is risk there in that there's risk tothe underlying token price.
And what does that mean for your product?
There is risk to the underlying infrastructure.
And what does that mean for your product?
So there isn't one answer, and we are not hereto pick favorites.
And we do believe that there are differentanswers for different use cases and different
(06:49):
founders, but I would say the most importantdecision to make as far as, like, the start of
your journey and on the decision tree is whichprotocol you're going to build on.
Can actually, let's say, pause and rewind inthe most important decision to make of which
problem are you gonna solve for people orconsumers or end users.
And then what is the best architecture andinfrastructure to help you achieve that goal?
(07:15):
Because as mentioned before, there isn't oneanswer.
There are some islands, blockchains that arebetter Morgan certain use case, and there's
some that are better for other use cases.
So figure out the problem.
That you can uniquely solve.
And then the biggest choice from there is whatisland are you going to build on.
And the reason why it's so important is for thereasons I mentioned before, infrastructure of
(07:39):
what that will impact your product and businesstoken price will impact your product and
business.
And then also it is the community and theinfrastructure that is built around that
island.
So Morgan instance, like some Blockchains aresupported on a lot of exchanges.
Some blockchains are supported on fewerexchanges.
Some have more on and off ramps, meaning it'seasier for consumers to get fiat money US
(08:04):
Beller, euros into and out of those.
So there are all of these ancillary ecosystembenefits or disadvantages to various
blockchains.
And the most important decision you can makeonce you figure out what you wanna do is which
blockchain are you going to build on?
One of the most important heuristics toevaluate those blockchain through is the
network effects lens.
(08:25):
So we will be putting something out that willevaluate various blockchains through various
network effects, lenses, and Stay tuned forthat.
The second bucket are the web 3 founders thatare native to web 3.
So you have Pete, slept, and breathed thisworld for the past.
(08:49):
You don't even remember life Morgan, and welove you too.
And we are so excited to work with you as well.
So you are kind of rolling your eyes at what Isaid in the last section.
You know the ecosystem.
You are very familiar with the pros and cons ofthe various blockchains, but We believe that
there are some learning lessons from the beforetime that are still relevant to you.
(09:10):
We recognize that Web 3 is this whole newworld, and that a lot of the mental models from
web 2 and earlier do need to be thrown in thegarbage because they do not apply.
But we also believe that there are commondenominators from the before times that are
still relevant.
And, of course, that includes, like, thenetwork effects framework.
So we will be talking about that today as well.
(09:32):
I'll also add that my partner, Gigi, has amental model for types of businesses in Web3.
And he says that there's 3 types of businessesin web 3.
1 are kind of the completely net new products.
So I think L1s, which the old world doesn'tapply.
They are valued and who knows how.
And they have James, and they have cultfollowings, and they are religions, and they
(09:56):
are wonderful, and it's hard to or harder toapply mental models from the before times to
those.
Then the second bucket is products that are netnew to web 3 and that they could not have
existed Morgan.
And everything about them is Web 3 native, butthey are still grounded in some reality and
(10:16):
that maybe they still have an equity evaluationversus a token valuation, something else we can
talk about.
And maybe they also have to acquire users insimilar ways.
And then the 3rd bucket are web 2 businesseswith web 3 sex appeal.
I'm allowed to say that, which are businessesthat are still really traditional businesses in
(10:36):
that they are still based on transactionvolume, or they still have to by Facebook ads,
or they still have to do enterprise James.
Like, a lot of the inner workings of how thesecompanies will be built and how they will
succeed are really the same as they were, butwhat they're selling is a product that touches
the web 3 world in some way.
And those products and founders really need tostudy lessons from the before times.
(11:02):
So we work with teams in all three buckets, andwe are excited about all three buckets.
For the 3rd bucket, I would say that thecaution is thinking that those businesses are
maybe more net new than they are.
Now that I've been at FX for a long and a short18 months, I've met with 100, if not thousands
(11:24):
of web 3 founders, and I've realized that thereare these common denominators if you wanna
build network effects into your business.
So With that, we've developed a 3 partframework for how to Beller network effects
into your business.
Stage 1 of the framework is network binding.
Network of bonding is really important.
You need to start with your community.
(11:46):
You need to start with the people that you'resolving a problem for, and you need to talk to
them.
So instead of building in a vacuum and thengoing out into the world and hoping that the
users exist and that they want what you'reselling them, we believe you need to invert it
a bit, which is start with the people thatyou're solving a problem for, but not only
that, because that's always been Morgan.
(12:08):
Start engaging with them sooner and having themengage with you sooner.
So I recognize that animal farm didn't work andthat there's a spectrum Pete.
And we still believe that there does still needto be some team that is building and making
decisions and using their judgment at the sametime, we believe that instead of that team kind
(12:28):
of being off on their own and then coming upfor air when the time was right to launch the
products that That team needs to be engagingwith the people that they're solving a problem
for Currier, meaning specifically that ask themwhat they want, ask them what features they
want, ask them, what they're looking to see inthe product on day 1.
(12:49):
And to the point that there's a spectrumbetween complete dictatorship and animal farm,
I would say maybe make a finite list of whatare the parameters in your product that you're
comfortable letting the community have controlover or letting the community have some say
over and let them play kind of in that sandboxbecause it would, of course, be chaos if you
(13:11):
opened up the whole scope for the whole world,and that's why there are people who are product
managers and there are people who are engineersand there are experts at certain things.
But you do want your community to feelownership.
And specifically, like, the litmus test that Iuse as a proxy is, does your community, does
your user base feel and know that the productlooks and feels and is different because of
(13:32):
input that they had.
And, again, whether or not that's true, itshould be true.
It's very important that they feel that waybecause coming back to the ethos part of web 3,
you want the people you're having a problem forto feel like they are really owners.
But one of the more common ways of networkbonding and crypto that we see is tokens.
So Tokens are interesting because they are autility that is unique in how democratic they
(14:01):
are.
And by that, I mean that in the past, therewere different tools used to incentivize
different parties related to a business.
So you are Facebook to use them Morgan.
And you pay your employees with cash, and youalso pay them with equity grants, and you pay
your contractors with cash, but those are in ofcontracts, but you also have stock that public
shareholders can buy.
(14:22):
And there's various forms of compensation thatcan be used to coordinate the parties in your
ecosystem.
In crypto, that is democratized and thatthere's one unit, and that is your token.
The value of that token is tied to the healthof the product or the protocol.
So when the product and protocol is doing,right, or is doing well, the value of the token
(14:44):
goes up.
And, again, if used as a tool, anincentivization tool, then you have all of the
various constituents in your world, customers,employees, contractors, partners incentivized
to make the token go up, which, again, isincentivize to make your business and protocol
healthier.
(15:05):
So as we keep saying, we believe that thesocial network effects, the ones on the outside
of the map, are the extra important ones forweb tree founders as far as where to start.
And I'm realizing that it's worthwhile to pauseand go over what those social network effects
are.
So the social network effects are tribalBeller, bandwagon, and language, and let's go
(15:27):
through each one.
So tribal is finding your tribe, finding groupsof people who share a common interest, whether
that's baseball cards or Morgan credits, orArizona ID.
Once you find those people, the beauty is thatit's no longer one to no longer you trying to
find those people, it becomes money, and thegrowth then becomes exponential.
(15:50):
And your tribe helps instill the second networkeffect, which is the belief network effect.
So the belief network effect is much like goldand religion, and Bitcoin, which we will get
to.
And the belief network effect is creatingshared beliefs among a group of Pete, so that
they are motivated to achieve a common goal.
And once more people start to believe in thesame thing, the value of that belief rises.
(16:13):
The bandwagon network belief is more or lesscreating FOMO, creating something that feels
exclusive that the people on the outside wantto be a part of.
And that the people on the inside feel reallyspecial to be a part of.
And then last but not least is language.
And language isn't the most important.
It's not like you can't start without it.
(16:34):
But it's a very, very nice to have.
And language is this subculture that peoplewanna be a part of.
And you see it between projects, but you alsosee it at crypto at large.
Like, if you saw people saying g n for goodMorgan, or if you see people spelling when WEN
instead of WEN.
Those are all of the little things that createthe shared language and the shared subculture.
(17:00):
Between a group of people, which makes it feelmore like a tribe.
So even though those are 4 distinct networkeffects, you can also kind of see how the 4
social network effects play together.
And build on each other and can kind ofsnowball.
It's definitely something you should beshooting for.
So the 2nd phase is once you have your socialnetwork effects in place or a good enough
place.
(17:20):
The real challenge is that how do you navigateyour team, your product, and your tribe closer
towards the center of the circle?
So social network effects are great and strong.
And again, where we believe web 3 foundersshould start, but the trick is that the
strongest network effects are actually in themiddle.
So as you figure out where you're going to landin that center, think of some examples.
(17:41):
Are you a platform like Ethereum where you arebringing developers to bring DApps and products
experiences on top of your platform.
Are you a marketplace?
Like OpenSea where you have buyers and sellersand you're at the center of that, or are you a
market network where you have end size of yourmarketplace, which make it even stronger
(18:01):
because there's more constituents that are tiedto your success.
The goal of stage 2 is navigating towards thecenter of the circle to find a more defensible
position and landing place for your company.
Stage 3 is reinforcement.
So once you have your social network effectsand once you've chosen your network effect,
that's more towards the center.
How do you reinforce that?
How do you build defensibilities ofdefensibilities?
(18:23):
How do you build Beller the walls of yourcastle even higher?
How do you further ensure then it's harder tocompete with you.
It's harder to replace you.
It's harder to make you irrelevant.
Reinforcement is an area where web 3 isparticularly awesome.
So in web 2, reinforcement, the onus was on thecompany, the onus was on the founder, to
(18:45):
continue to build those defensibilities ondefensibilities.
In Webb 3, if done right, and that's why thesocial network effects are so Morgan, but you
have a tribe working for you.
And it's kind of the self fulfilling prophecywhere not only are you and your direct team
working on the reinforcement and the defenseabilities on defense abilities, but you have a
(19:07):
tribe that has a belief system and a sharedlanguage that's out there kind of processes
into the world, the power of your product andyour platform, and incentives aligned are
aligned across all constituents of yourcommunity to continue to reinforce these
network effects.
And instead of it being, you know, one to manyMorgan centralized team to many in this effort.
(19:31):
It's many to many, and that's where even thereinforcement growth can be exponential.
If you set the social network of X buildingblocks in place correctly from the beginning
and nurture them over time, And that's why tobring this full circle, we really, really
believe that starting there is importantbecause if you sew those seeds early, it kind
(19:55):
of just continues to pay off for years years tocome, and we'll continue to build that Pete for
you which will make your life easier later.
So invest the time early to build the socialnetwork effects that later when you're at the
reinforcement stage, you have a whole army ofpeople working for you with you.
(20:16):
So if you're starting a web 3 company, werecommend following this 3 stage framework.
To build defensible network effects strategyinto your business from the earliest days.
As we try to tie in these DM learning lessonsover the course of this course, One that I'm
(20:38):
reminded of is how we really took that web 3ethos to heart.
So we knew that we were maybe the ones comingup with the initial idea behind at the time it
was called Libra, but we also knew and feltdeeply and strongly that Libra had no chance of
success if we didn't make others not only feellike they were owners, but actually also be
(21:00):
owners.
So almost on day 0, we went to recruit otherorganizations, individuals, and entities to be
part of the labor process from the earliestdays so that everyone felt a sense of ownership
and so that it didn't feel and so that it notonly that it didn't feel, but so that in
(21:20):
reality was not owned or controlled or birthedor conceived by 1 centralized entity.
And that was really important to Morgan.
Kind of every step along the way.
We kept pausing and checking ourselves andsaying, is this truly a process that is not
owned and controlled by us?
Is this truly a community that we're buildingwhere everyone feels like Libra is as much
(21:45):
theirs as it is ours?
And is this truly a product that can stand onits own without us?
And that's one of the really important litmustests to ask for any Founder and Web 3.
Like, of course, there's gonna be a phase whereyou're needed and you're wanted, but an
ultimate goal is to envision a future where oneday if you were to disappear, can that product
(22:07):
or protocol live on its own?
And that was always something we askedourselves every second and every day over the
labor journey.
If you've made it this far, thank you.
And you also have heard and hopefullyunderstand why we believe network effects are
so important for web 3 starting from socialnetwork effects to more of a center of the
(22:32):
circle of what is the main network effect ofyour business.
But at the same time, I'm gonna admit we don'treally know anything in that.
It's so early.
And if you're new to web 3, I don't want thisto be intimidating, but I also really want you
to feel that it's so early.
And you hear people say that, and you mightthink it's a joke, but it's true.
And as my partner, James has been following andstudying and building and learning in the web 2
(22:56):
world, He has discovered new network effectsfrom the web 2 world as web 2 has evolved, such
as the hub and spoke network effect.
So although we're here today, preaching what weknow.
We also are very cognizant of the fact that wedon't know a lot, and we expect to discover new
network effects that are specific and relevantto web 3 as the space emerges and as web 3 eats
(23:19):
web 2.
So if you enjoyed this course, please staytuned and subscribe and join the NFX family so
that you can learn and discover with us as thisworld evolves.
Stay tuned to the NFX podcast as we'll post 1episode per week until we complete the course.
Can also watch this entire master class onlineatnfx.com/masterclass, where you can log in,
(23:45):
track your progress, and watch full videos,retranscripts, and find other related material.
Thanks for listening to the NFX podcast.
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