Are we obsessed by growth through the networking effect?

Raising cash to pursue the networking effect — growth at a rate that allows you to dominate your space — is one of the core investment thesis behind technology. But balancing goals is also important and a single-minded focus on this should not blind us from another core priority: excellent product. Excellent product combined with reasonable sales investments based on pre-set KPIs will allow you to navigate unpredictable ground and is likely to substantially increase your chances of success and reach the desired networking effect.

The networking effect is a tool that can be used at all levels, but deploying all its resources via a sales effort is not necessarily the right solution. It is its own fame — the networking effect of the networking effect — that gives rise to the temptation to focus on it to excess.

Assessing Excess

Generally, when the cost of acquisition of a client (CAC) is greater than the clients’ lifetime value (CLTV) you need to rationalise whether the need to grow as fast as possible is greater than the need to address a lack of profitability. If your growth rate is less than 200% and you are not able to grow faster than your competitors, it may be time to rethink your business model. At this stage it will be harder to convince VC’s and Debt investors to finance your push for growth over profitability.

In a similar vein, raising cash for the purpose of faster growth to counter new competition can be a difficult proposal to justify. For an investor, competition is only good because it confirms that you are in an interesting market. It is not a motivator to inject extra cash since this would tend to imply a lower return for an increased risk of failure.

When is it appropriate?

When it is your skill set. If you are an excellent fund raiser and communicator, your advantage lies in raising much more than your competitors. Then the CAC is less relevant than the amount you can manage to raise without losing control. In reality, it’s a rare skill to have, but the benefits of growing to become the reference point in your space means that your clients are less price sensitive and you can then start to price for profitability. The challenge is then to not use the networking effect as an excuse to back up poor investment decisions.

The alternate path

Focus on your product — when you know, you know. Many founders realise that their skill set is geared towards what they are building, rather than networking and fund raising. In this scenario your advantage lies in your product. A good product has its own virality and networking effect. Think of all the products that have been pushed via being bundled with other packages, but have not taken hold as people stick with their preferred solutions due to a higher quality experience. For example, Zoom being used by google users as an alternative to google hangouts, Dropbox instead of sharepoint, google maps in the Ios as opposed to Apple maps… You can pursue this goal to dominate your space using a lever that is more natural to you. With product quality in place, it is easier to outsource the process of fundraising so that you can manage it at a high level whilst continuing to focus on what you do best.