Why Australian startups can’t ignore the network effect

It's a touch life being an Aussie startup at the best of times. The network effect can help. (Picture: Dennis Skley, Flickr)

It's a touch life being an Aussie startup at the best of times. The network effect can help. (Picture: Dennis Skley, Flickr)

Australian startups and technology companies that fail to embrace the incredible network effect will soon be eating the dust of their smarter, faster rivals.

A traditional startup’s path to market is a single channel and go it alone. Many newer startups are choosing to go to market using platforms, leveraging other companies’ groups of customers, and quickening their time to market. Startups that build in isolation are missing the chance to accelerate their path to market, complement and add value to existing solutions in the market, and achieve highly scalable growth.

Companies can use open API models to establish a platform that other startups can leverage and centre their operations around. The network effect takes hold when a company drives demand, adding customers to their platform, and the add-ons enhance the platform with their own technology.

The platform grows in value when both companies simultaneously add customers to the ecosystem.

Think of the first day you got a mobile phone. It was novel, but it didn’t change your life. Suddenly, when everyone you knew had a mobile phone, things started changing for the better. When more people use the technology, the value increases exponentially.

The most common network effect we interact with daily is Facebook. The value of Facebook when it was restricted to college students in the United States was limited, but with more than one billion daily active users, it’s an almost indispensable way to stay in touch with friends, family, colleagues, and the world around us.

Any company that has an opportunity to either create or tap into a network effect is missing a trick. If you've got hundreds of thousands of cloud subscribers, the value they get from their cloud experience is greatly enhanced by all the other small businesses on the platform. The wealth of data on the platform helps create new features and services, small businesses can directly connect through the platform for faster payment, and integrations mean the overall benefits are greater than if the platform operated in isolation.

This is the opportunity for Australian entrepreneurs — platforms like this don’t just offer a way to reach new customers. If you are building a technology startup, you would be making a huge mistake by ignoring the network effect.

Find the platform — or platforms — where an integration can truly add value for both your customers and theirs. Once you’ve found that, dig deep and identify the precise market dynamics and how they relate to the network effect at play.

If you identity this correctly, and truly embrace it, you will enable a flywheel of growth for your business.

In this sense, it’s possible for Australian startups to piggyback off a platform for a mutually beneficial outcome — for itself and for all shared customers.

It’s worth taking a look at how some companies around the world are doing that, and learn from their success.

Amreeta Abbott is the CEO of NowInfinity, which makes legal, tax, and accounting documentation easier than ever before. “Today’s world is all about sharing and collaboration, enriching and value adding the experience of one technology and overlaying it with another. APIs have really forced many businesses to think always from the perspective of the end user, and I think this is a great thing.”

The co-founder of Fathom, David Watson, talks about how integrations between platforms is helping to improve management reporting for accountants and small businesses. “It’s no secret that cloud accounting is streamlining traditional accounting workflows. The exchange of data via APIs is responsible for much of these efficiency gains. Open APIs remove the time-cost of getting data into (or out of) systems. So time that was previously spent manually keying data can now be spent harnessing this data, to gain insights and make better business decisions.”

That’s the key to unlock the network effect. Your startup or technology platform needs to work seamlessly with others. Lock your platform down and you’re destined to be outpaced by more agile, innovative rivals. But embrace the ecosystem around your product, and tap into the network effect, and you’ll be on a path to growth you previously only dreamed of.

This isn’t just a local opportunity. If you identify the right mutual gains you can create in a system or platform where a network effect is present, you’ll reach customers you couldn’t previously reach. For many Australian startups, this means that they can go global sooner than they otherwise could.

Too many Australian startups and technology businesses have failed to identify and embrace the network effect, and it’s time that changed. Ecosystems have played a major role in driving high-growth companies to success. With cloud software, it’s easier for any startup, anywhere, to build a globally scalable product.

Trent Innes is Managing Director of Xero Australia

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Trent Innes

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