Published in the San Diego Union-Tribune, July 17, 2023
by Neil Senturia
I recently got an education in entrepreneurship meets how the world really works.
In the classic economic model, the perfect outcome for the rapid growth of a platform is to try to create a network effect. In simple terms, a network effect refers to any situation in which the value of a product, service or platform depends on the number of buyers, sellers or users who leverage it. Typically, the greater the number of buyers, sellers or users, the greater the network effect.
Any service being offered becomes more valuable as usage increases, and that greater value is created by each node in the digital network being connected to every other existing node so the value increases as the square of the number of nodes.
Note: One of my earlier companies created a “mesh network” security software system for a three-letter government agency. My first foray into Washington, D.C.
One of the basic entrepreneurial principles is the idea of “partnering” — that is working together to grow the pie. From partnering you can perhaps move to licensing, eventually perhaps to joint venturing, and then ultimately to acquisition.
Most big companies, brands or consumers do not buy a pig in a poke before they sample the bacon. And in certain economic instances having to “pay to play (P2P)” is standard operating procedure.
The broadcasting industry. Think Shopping Network. P2P is not uncommon in the music industry. It is obvious in the online gaming industry. Stand-up comedy. You pay to be on stage to strut your stuff. Engineering, design and construction — where it is perhaps common, but also often illegal.
Corporate finance. This is definitely some thin ice, because “gift-giving” to politicians or municipal entities can bounce right up against the appearance of corruption or undue influence (e.g., perhaps a certain Supreme Court Justice). I leave the nuances to the legal eagles.
And finally, politics in general. Campaign contributions et alia. You and your company want to profit, and so you pay/contribute/donate something hoping to get something back of greater value.
Neil, you schmuck, this is how the world works.
Lobbyists/agents/gatekeepers need to eat also, so don’t think you are going to change the system.
But that world of grift and greed is antithetical to the network effect. That world operates as a one-to-one. I get, then you get, and then I go to get from the next person in line.
I have a little company that ran into this buzzsaw recently. They were going to do something to make the other company money, and that company wanted them to pay upfront for the privilege of doing that. They thought their asset was their access to who they knew. Their “list.”
But in my dinosaur brain, what I have learned over 40 years of deal-making is that the pie gets bigger when both people eat at it. Fascinating. How can the more you eat actually increase the amount of food available?
Software and the network effect. If politicians and companies saw their Rolodexes and their distribution systems and their purchasing power not as an asset to be parsed and allocated with an eye dropper, but more as the base of the pizza with the smaller partner bringing the pepperoni, they would sell more pizzas.
If this is so obvious, why is it so often difficult to convince the other guy of the value of cooperation?
For that, I go back to basic behavioral economics. We defend our turf, we look out for ourselves first, and we worry about not getting credit. Greed operates in the smallest corners, and taking any risk, of any kind, at any time, without checking how it will play somewhere is not what most of us humans were trained to do.
Wanting a different model sounds naïve. But I am on solid ground here. My guiding light in all this is Adam Grant, Wharton professor, who is famous for proving that “givers do better than takers.”
I look around at homelessness, at health care, at education — the list is endless. And next to all those puzzles is a graveyard of decent, interesting and maybe even brilliant odd-shaped pieces that might have fit into partnering and mutual exploration, but they are left on the board to die a quiet death.
Rule No. 763:
“The universe is continually expanding.” — Edwin Hubble