Can Koo Overcome Its Anti-Network Effects?

While we hope for Koo's success, the reality is that combating its downward spiral is proving to be a tough challenge.

Every social media company depends heavily on the network effect to gain a competitive edge. But before we dive into what that means, let's first take a look at Koo's financials and its present situation.

Revenue: Jumped 75%, from INR 8 Lacs in 2021 to 14 lacs in 2022

Expenses: Increased by 714.5%, from INR 24.8 Cr in 2021 to INR 202 Cr in 2022

Loss: Increased by 459.5%, from INR 35.2 Cr to INR 197 Cr  

Initial losses for a product benefiting from network effects do not necessarily signal a weak business model, as long as there is significant user growth, strong user retention, and increasing engagement with the app.

But Koo is  going throughout a difficult face right now-

Koo, often hailed as India’s Twitter counterpart, has been navigating a challenging landscape in recent times. As the global funding environment tightens, the company has faced hurdles in securing capital and sustaining its operations.

In the recent development salary payments have been halted due to cash crunch and delay in securing funds from investors. In June 2022, Koo was valued at INR 2,230 Cr during its last funding round. However, by September 2023, the company’s cash balance had dwindled to approximately INR 20 Cr.

Furthermore, Koo grapples with the dual challenge of retaining and expanding its user base, while also contending with the classic issue of anti-network effects.

Let's break down what network effects are. Simply put, it's like a math equation: n^2. This means that each time the number of users doubles, the value of the network within the app quadruples. Conversely, if the number of users drops by 50%, the network's value decreases even more. This phenomenon is known as anti-network effects, a negative force that can drive new networks to zero.

Consider WhatsApp—it only becomes useful when your friends and family are also on it. Similarly, Slack requires your colleagues to be on board for it to be effective. And for services like Ola or Uber, you can't use them until there are enough drivers, who won't join until there are enough rides.

The challenge lies in establishing a stable network that can sustain itself without constantly pouring in more money. This is when we can truly say we have a customer. Remember, for network products, one user doesn't equate to one customer.

Expanding on this point, Andrew Chen from Andreessen Horowitz interviewed Slack's CEO, Stewart Butterfield, to uncover the minimum number of users needed for Slack to become functional.

He answered: Slack works with just 2 people, but it takes 3 to make it really work. There are long running 3 person groups that are stable- that’s the minimum required to be called a customer.  

Source: The Cold Start Problem

So, as you've observed, having three users is crucial to stabilize the network, and this is what we refer to as a customer. In Slack's case, they initially targeted just three individuals within an organization to kickstart the product's functionality. These initial users would then invite their colleagues, who in turn would invite others, creating a ripple effect of growth.

Now, having understood how network effects operate and their potential drawbacks, let's examine how they come into play in the case of Koo.

Koo struggles to retain its users, particularly content creators, which diminishes its appeal for new users. This creates a cycle where content creators leave due to a lack of new users joining, showcasing a classic example of anti-network effects.

To overcome these challenges, Koo must distinguish itself from other social media platforms. Similar to Facebook's early strategy of focusing on Harvard students before expanding, Koo needs to identify and cultivate its initial user base. The real challenge for platforms like Koo lies in attracting content creators, who are the driving force behind user engagement. Therefore, all efforts should be directed towards offering content creators a unique and compelling experience on the platform.

Koo is yet to find their initial users who love the product and would brag in front of their friends and family. For a network product, simply having millions of users isn't enough. In the early stages, what's crucial is building a stable network to sustain growth. If the product is exceptional, it may even become viral, sparking automatic expansion. Without this stable foundation, growing a network product is nearly impossible.

Google+ serves as a prime example—even with millions of initial users and significant investment, it failed because it couldn't establish the necessary stable network for success. But we'll delve deeper into this another time.

However, we remain hopeful that Koo will soon overcome its challenges and bring pride to our nation.

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 Disclaimer: This article is for informational purposes only and does not constitute financial advice. Readers are encouraged to conduct their own research and seek professional guidance before making any investment decisions. 📈🔍