You're listening to episode 7 on why network problems demand network solutions from the network effects master class here on the NFX podcast.
This episode is hosted by Juno partner, James Currier, as he discusses how network effect businesses are reshaping the world, why it's our responsibility to design and thoughtfully set up social contracts with your different constituents and the need to have a perspective about what you are giving and getting from the people on these networks So how are you going to run your network effect business?
And now that the internet's here, now that web 3 is here, and now that you understand about network effects, you have lightning in your hands. So let's take a historical step back. Where are we now? We've always had networks, right? As soon as we had ten thousand people living near each other 8000 years ago, you had a commerce network. You had network effects playing out around marketplaces where people would gather and trade. They just played out in slow motion.
They just played out at small scale. Now that we've got the internet, of course, we've got millions of people connected, and it's happening in an instant, geography's gone, time is gone. Pete at 1000x what it used to be. It's a different order of magnitude. However, even back then, they were dealing with power laws. Okay. They were dealing with this conundrum of the fact that once networks form, power laws Morgan.
And we are struggling with it today as we look at income disparity, and outcome disparity in our own societies, And the internet is only accelerating these power laws. The way we say it is the degree of the power law is getting greater. Okay. So you have just Bezos with 300,000,000,000 and, Elon Musk with 250,000,000,000 or whatever it is. That's incredible quantities, accretions of capital that the network is driving to the peaks of the power law.
And why a power law, we just mean that the people at the top have so much more than the next person, the next person. So you might think that the top person has two times as much as the next person who has two times as much as the next person, And then you have this very long tail for the 95% who get a smaller percentage of society's Beller. An outcome or status or appearance or attention.
Okay. So everything in a network conforms to a power law It has always been thus, it will always thus be, but it's a problem because 95% of people are in the long tail, and only the very people at the top get to have all the spoils. And it makes us all upset that it has to be so disparate. The business you start is likely, if it's got a network effect, going to create a similar power law.
Among your users, perhaps among your employees, some of which will earn great riches and others who will earn some. Okay? And so you have to think about how you're going to operate within this context. Now years ago, Alvin Tafler wrote a book called Future Shock in 1970, in which case he laid out that we used to have the agrarian economy where 95% of us were involved with making food. Now we're down to less than 1% of our society. It's transitioned.
The 2nd economy was the scale where it was manufacturing, where we learned to have factories, manufacture large things. And there was a lot of people who were very upset with this phase, right? Dickens Dickens wrote about the conditions that people were living in in London in the 1850s now that we had these factories and the smoke was being belched out and no one was really enjoying their lives, all being slaves to this new machine.
And then we had Marx come along, and he a hysterical twenty eight year old talking about the 2 tribes of the winners and losers in this new economy and what should thus take place because the losers should be on top, etcetera, etcetera. That's all that Marxism, there was a lot of upset about this new way as we move from agrarian economy to industrial economy. And in 1970, Beller said we're now moving into the information economy.
But he didn't have the benefit in that time of seeing the internet. If he had, I don't think he would have called it the information economy. He would have called it the networked economy. Or the network economy, because what we're seeing now that we have the internet and web 3 is that the means of wealth creation is the network Just like it was with the industrial age, the means of wealth creation were the manufacturing lines. Now the means of production are the networks themselves.
And so there's this increase of, of this power law because we can now reach billions overnight. Okay? But it's the same math playing out just in more extreme forms over time, and we are now in the network age. So how do we know that we are now in the networked age. Well, number 1, if you look at the top 13 market cap companies in the world, 15, 20 years ago, it was mostly industrial age companies, oil companies, manufacturing companies, GEGM, IBM blah blah.
Today, it's Apple, it's Google, it's Facebook. It's these network effect businesses that are built on digital technology. Okay? That's one way that you can see that we are in the network age. We now have 3,000,000,000 people attached to the network, and we can all communicate with each other. And this, those people account for 90 or 95% of all the economic activity in the world. Now, 100 years ago, people were in their separate geographies. They were in their separate industries.
The connectivity was slow, and it was imperfect now. It's complete and perfect and instant. Okay. We are in this network age and the, the capital, the wealth, and the status are flowing to the network to the central node of the network. Being on a steeper power law, just tell feel good to people because it's so clear to you that you're not the winner, that you're not valued by the network.
Okay. An example would be in the olden days, maybe 30 years ago, there would be 30 real estate agents in my town in New Hampshire. All of them would have friends. Those friends would call them up and say, please list my house. And they could all make a pretty good living being a real estate broker. But now, because it's Zillow and Trulia, I can see who the very best agents are in my town.
And if it's the biggest financial event of my life, I'm not gonna trust that event to the 30th or 16th or 8th best agent in my town, I want the 1st or second or third, and I can see who they are. Through these networks, through these digital networks. And so the amount of business that's going to the top few agents is increasing.
And they get wealthier and wealthier, and the other agents who might not be as extroverted or charismatic or who don't know how to decorate a house as well, they're earning less and less. And so they don't feel good, and they can go on Zillow and Trillo, and they can see that they are not the top agent in their town. How does that make them feel? Okay. So when you go on YouTube, when you go on truth, when you go on you, Twitter and you see your numbers, now we can see the power law.
This is a huge difference in how we live from day to day. That didn't exist 20 years ago. You could pretend you were a good agent. You could pretend you were famous for a good looking word. Now you can see that you are not and that you're on the end of the power law, that you're a small person, and it doesn't feel good to us. And when you build your network effect business, that business might have that effect on millions of people.
And if you have workers like Uber drivers, some of them are gonna earn very little money and others will earn more, and you're gonna create a power law of earners on your network. Same things happening on eBay Morgan Amazon marketplaces. Some of them are getting great riches and others. The opposite is happening. Okay? So designing your software with society in mind, with the power law in mind, how are you going to make it so that more people can participate.
How are you going to make it so that more of your employees can participate in the riches that are created by your company? Need to take those things into consideration as you think about designing your network business. Now let's look at what people fear about these power laws, and I can understand their fear about them. What they fear is that the rich will get richer and the poor will poor and poorer. What actually happens is that the rich do get richer and richer.
You do see bezos as an Elon Musk's emerging with 100 of 1,000,000,000 of dollars. But because people can now access the central nodes of the network, by being Uber drivers, by working on Amazon Marketplace or whatever, they can now participate in the greater wealth generation of society in ways that they couldn't if they were in disadvantaged geographies.
They now can participate and actually increase their wealth and their well-being more than they could have when they were isolated and kept out of the central networks. So yes, the power law will get steeper, and those people will get richer, but that doesn't mean that the people in the long tail, the rest of us, can also increase our well-being and increase our lifestyle.
So now that we understand the power laws, you can start to see the implications All societies have a social contract with their citizens. All companies have a social contract with their employees. And in the past, the, the American contract was if you work hard and stay at your job for a long time, you'll be rewarded with a good pension and a house with a picket fence, and 2 children and a car in the garage, and all will be well. Pay your James, and all will be well.
That was the 1950s version of the social contract. Now that we have the networked economy, the social contract is gonna need to change. And your business, when you build 1, is gonna be a participant in evolving what that social contract needs to be. And you need to think, what's my contract with the people on my network? And what's the contract that I have with my employees?
Okay. So with the people on your network, Pete are some rules or here's a list of things to think about as implications for how the network economy works and how your business works. So this requires you to think through what the new social contract is between you and the creators on your platform or the drivers on your platform, the labor, this on your platform, the people, and your employees. What is your contract with them? What is your promise to them?
Okay. So now, What's emerging because of the way the Internet of Web 3 works is that what they give you is they give you their data they allow you they allow you to track them, and they allow you to optimize their labor and their work so that you can run your business. Now that is giving up some privacy compared to the way we were 60 years ago as a society when we didn't have the tools, to measure and track people. But now that we do, we're doing it. And that's what people are giving up.
But what they get and what they should be getting from you is the following 12 things. The first thing is you need to give them ownership. Now you can do that through shares, or you can do that through tokens or through NFTs. Okay. And you're gonna have a combination of shares, tokens, fungible tokens, and non fungible tokens that you're gonna be using over the next 10 years to give ownership and benefit to the people who work for you or work on your network. That's the first thing.
Second thing is that you need to let people defect. They need to take their reputation. They need to take their skills and go to a different network if it's gonna benefit them. I know that hurts you and you want to lock them in. But the fact is if you have the best network, they will want to stay with you anyway. And if you get the network effect and you have the highest liquidity, they're going to stick with you anyway. So don't worry too much about that. Just do a good job.
Let them defect, and they won't, if you continue to do a good job. The third thing you want to do is to be transparent with them. You need to give them data on how they're doing and how they can improve how they're getting paid, when they're getting paid, Transparency is important to treating people honestly and well. Number 4, you need to agree to take care of their psychological needs. Pete are living in your company. They're living on your network.
They're taking care of their family by doing both, and they do have psychological needs and you need to understand that they need to be shown where they fit into the pack and how they are not alone. Number 5, you want to think about how you give the labor and the users of your network ways of feeling competent in your interface. Beller them they are smart. Tell them they are making good decisions. Show them how they are doing well today.
Number 6, you can now embed good management of people in the software. People stick with their job because they like their manager and how many of us have had bad managers who didn't get the training, who never got shown how to be a good manager. And so they were bad managers and made people miserable working for them. Well, you can solve that at scale using software and using systems and processes to bring good management. That is possible now, and you should take that responsibility.
Number 7, you should give them ways of helping themselves to develop their Currier, give them a graphic, show them a path how they're gonna progress, like a video game, or like school or like getting different belts in karate. We all like moving up the Levy-Weiss, show them how they will progress in their careers so that they can feel a sense of accomplishment and mastery as they progress. Number 8, give them ways of helping each other by joining groups that self improve together.
You feel like it's more personalized. You feel more human in that. So you can actually create your product and your software so that they can join groups that self improve together. And it will really benefit their lives and their careers. Number 9, give them their metrics transparently about their behavior and their network so that they can see how they're doing don't keep them in the dark.
Number 10, you can help the labor find their highest and best use, possibly by giving them credit to an AI or a human career coach to let every node in your network perform at its highest and best use. It's good for them and it's good for you and your network. Number 11, you really do need to let labor multi tenant, meaning they can work for more than one employer at a time.
Multi Tenity is the way of the future it's unnecessary, and you need to allow people to do that and take their data with them. And then the last thing I would suggest is add an ombudsman to your network. So The Ombudsman is an old thing that used to happen in newspapers, which is a network effect business. It's a marketplace between advertisers and viewers.
They used to have Ombudsman there that were beholden to the stakeholders not to the CEO of the newspaper that having that voice in the room at the board meetings and in management meetings is critical to understanding who all the stakeholders are and what their needs are and having that be part of the DNA of your culture, of your management team, and of your network.
So look, these network effect businesses have the greatest potential to benefit billions of people with tremendous wealth over the next 25 years. And you can be a part of that, but you have to recognize the power law implications of the way your business works and the network economy now works.
And you have to take stewardship and responsibility for establishing the proper social contracts with your employees and with the nodes on your network so that society overall can function better and benefit everyone while still benefiting you, the one with lightning in your hands, the one who actually understands this. Stay tuned to the podcast, as we'll post 1 episode per week until we complete the course.
You can also watch this entire master class online atnfx.com slash master class, where you can log in, track your progress, and watch full videos, retranscripts, and find other related material. Thanks for listening to the NFX podcast.