Later today I am talking at Point Nine Capital’s annual SaaS conference. The topic will be how to create network effects for SaaS businesses. Just as a quick reminder, a business has network effects if the value of the service increases for all customers as the business grows. Here are some of the ways that this can be accomplished:

First, there is the obvious one which is actually connecting businesses to each other. For instance, if your are in purchasing management and you connect companies to possible suppliers, such as Kinnek does. This creates market place like network effects where more suppliers create more value buyers and vice versa.

Second, pooling data can be very powerful. For instance, our portfolio company Sift Science applies machine learning to the fraud labels received from all customers. Sift can thus provide higher quality fraud detection than any company could get on its own. And as new companies join and provide their labels, the fraud detection gets better for everyone.

Third, you can create a network for the individuals that make up the companies. The most extreme example of that is LinkedIn. The network effect is for the individual participants but it makes it hard if not impossible for anyone to compete with LinkedIn’s SaaS for recruiters. Another company that has pulled this off very successfully is Github. Engineers have network benefits as individuals from being on github.

Fourth, you can expose your existing customers to third party developers through an API. To the extent that you have a lot of existing customers, developers will start to offer solutions on your platform. That makes the platform more valuable for all existing customers. This is what Salesforce has done.

There are definitely other smaller opportunities for network effects in SaaS, such as say open source contributions by customers.

Would love to hear from anyone who has other ideas for creating network effects in SaaS businesses (ideally with examples of businesses that have done that)! 

Later today I am talking at Point Nine Capital’s annual SaaS conference. The topic will be how to create network effects for SaaS businesses. Just as a quick reminder, a business has network effects if the value of the service increases for all customers as the business grows. Here are some of the ways that this can be accomplished:

First, there is the obvious one which is actually connecting businesses to each other. For instance, if your are in purchasing management and you connect companies to possible suppliers, such as Kinnek does. This creates market place like network effects where more suppliers create more value buyers and vice versa.

Second, pooling data can be very powerful. For instance, our portfolio company Sift Science applies machine learning to the fraud labels received from all customers. Sift can thus provide higher quality fraud detection than any company could get on its own. And as new companies join and provide their labels, the fraud detection gets better for everyone.

Third, you can create a network for the individuals that make up the companies. The most extreme example of that is LinkedIn. The network effect is for the individual participants but it makes it hard if not impossible for anyone to compete with LinkedIn’s SaaS for recruiters. Another company that has pulled this off very successfully is Github. Engineers have network benefits as individuals from being on github.

Fourth, you can expose your existing customers to third party developers through an API. To the extent that you have a lot of existing customers, developers will start to offer solutions on your platform. That makes the platform more valuable for all existing customers. This is what Salesforce has done.

There are definitely other smaller opportunities for network effects in SaaS, such as say open source contributions by customers.

Would love to hear from anyone who has other ideas for creating network effects in SaaS businesses (ideally with examples of businesses that have done that)!