- Pete Flint and his team at venture-capital firm NFX try to find startups with the potential for network effects.
- A network effect is a phenomenon where a product or service becomes more valuable, the more people that use it.
- Flint and his partners have experience with network-effect companies. Flint, for example, was the founder and CEO of real-estate listing firm Trulia.
- NFX just raised $275 million for its second fund, which Flint and his partners plan to invest in early-stage companies.
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Pete Flint and his partners aren’t like many of their peers.
Many venture-capital firms focus on particular technologies or industries, like artificial intelligence or healthcare. Flint and his team at NFX concentrate instead of finding businesses built to take advantage of network effects.
Network effects are what happens when a company’s service or technology becomes more useful — and potentially dominant — the more people use it. Think Facebook in social networking; the more people that are on Facebook and using it, the more likely they are to find people they know or posts they want to read.
“Our core thesis as a fund is about investing in network-effect companies,” Flint said in a interview this week with Business Insider.
The firm itself has some experience at this. It’s been around for four years. It started off as an accelerator, investing relatively small amounts in nascent companies and trying to help entrepreneurs get their ideas off the ground. It then moved into more traditional venture investing, raising $150 million for a seed-stage fund that allowed it to make bigger investments. Among the companies it’s backed are Lyft, community site Hometalk, real-estate service Ribbon, and disease-detection company Mammoth Biosciences.
NFX is going to be placing many more bets on network effects in the near future. The firm announced last week that it raised $275 million for its second fund, which it says is one of the largest ever for seed-round investing. NFX plans to use that to invest in about 50 early-stage startups, with room left over in the fund for follow-on investments.
“Our mission, really, is to find the next generation of these network-effect businesses,” Flint said.
Flint and his partners have experience with network effects
Flint knows first-hand the power of network effects. He was a founder of Trulia, an online real estate site that brought together people in the market for housing and those looking to rent or sell their properties. Like any so-called two-sided market, Trulia became more useful as more buyers and sellers, renters and landlords used it. The company was ultimately acquired by Zillow in 2015 for $2.5 billion.
His partners have also had experience with network effects. James Currier founded Tickle, a proto-social networking site that focused on personality tests and built up an audience of millions of users before being acquired by Monster, the popular career site. Gigi Levy-Weiss served as CEO of 888 Holdings, the operator of a collection of popular online gambling sites.
But Flint and his team have more than personal experience and hunches to go on, when it comes to the power of network effects. Their research indicates that some 70% of the value in technology companies as a whole has gone to those that have such a phenomenon at their center, he said. Meanwhile, many of the biggest initial public offerings this year have been of companies that benefit from network effects, he said, highlighting Uber, Lyft, Pinterest, and Zoom.
NFX’s focus on network effects “is born out from empirical research, as well as from just our own operating and founding experience,” Flint said.
Read this: VC investor explains how he finds surprising startups by focusing on the founders’ opinions instead of their initial product idea
NFX looks for ‘interesting’ markets and teams
Part of what he and his team like about such companies is that, by their nature, they tend to be efficient with capital. In many cases, they can grow without having to spend a lot of money on marketing and branding; potential customers find out about them by word-of-mouth.
What’s also attractive about them is that they can weather economic downturns better than other companies and often emerge stronger afterword, he said. That was the case with Facebook and the Great Recession and Google with the dot-com bust, he said.
“Fundamentally, we love the nature of these network-effect businesses,” Flint said. He continued: “We fundamentally can see opportunity in a recession for our companies to take market share.”
Of course, it can be easy to see once companies develop which ones benefit from network effects. It can be a much more difficult when startups are earlier in their life cycle. And that’s the challenge that faces Flint and NFX. The firm invests in nascent companies, ones that range from little more than an idea to a few million dollars in revenue.
But even there Flint and his team are open. They’ll invest both in companies that have a clear network effect opportunity and in ones that are seeking help finding one.
In trying to pick which ones to fund, they look for “really interesting markets, really interesting teams that have identified a unique need or identified a unique way to scale that business,” he said.
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