Perspective

Explaining Network Effects, One of Hamilton Helmer’s 7 Powers [Video]

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While there is a lot of information on network effects across various sources, we find it very powerful to use shared language with all our portfolio management teams.

To help facilitate this, Ed Cowan and Hamish Corlett made a video series covering how we think about network effects — what they are, the different type, how we assess their strength — as well as walking through some case studies to help illustrate our point.

Key topics covered:

  • What are network effects and why they are important (2:10)
  • The different types of network effects (8:12)
  • Assessing the strength of a network (18:00)
  • Case studies – Shutterstock, Canva, Square (Cash App) and more (23:21)

How Network Effects relates to our investment framework

As long term investors, with no constraint of having a fund life, we view ourselves as business owners and partners, regardless if we own less than one percent of a company or forty percent and sit on the board. As such, our framework for any investment decision is based on four key pillars, with the fourth, valuation, used as an important overlay to our assessment of the quality of the business, now and into the future.

Structural Competitive Advantage

The framework we use to assess the sustainable competitive advantage is based on Hamilton Helmer’s “7 Powers”. For ease, here is a great summary and review of the book of the book that Abi Tyas Tunggal recently published.

In our mind the most powerful of these 7 powers (we add an 8th being People and Culture) in our view is ‘Network Effects’.

In its simplest form a positive network effects occurs when a user of a network experiences increasing utility as the network grows.

As always if you have any feedback, please get in touch – hello@tdmgrowth.com

About the author

At his core, Hamish loves helping people create futures they never thought possible. As a coach, mentor, and co-founder of TDM Growth Partners, he brings experience from multiple top-tier investment firms as well as from his hiatus as a school guidance counsellor.

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