One of the most defensible positions for a startup is if you can achieve the network effect. The network effect is so strong that it has kept large companies in business for a long time, despite bad products and numerous competitors. Craigslist is a perfect example. It is only recently that a new wave of startups like Airbnb, TaskRabbit, and RentJuice have started to chip away at the Craigslist stronghold; it took over 10 years.
The network effect has also defended companies like Facebook from an onslaught of competition. I remember in the early days of Facebook that almost every campus had at least a few local startups that tried to overtake it, but once Facebook established a stronghold in a campus, it was impossible to unseat it. Facebook has also been in the sights of numerous international players, yet the only areas that have seemed to hold ground are Russia and parts of Asia.
Achieving the network effect is no easy feat. It comes with a huge hurdle: the chicken or the egg problem.
There are two versions of the chicken or the egg problem that warrant important distinctions, because each has a different solution.
Chicken or egg version #1 is when your product connects two different types of groups. Most people who call themselves platforms or marketplaces fit in this category—think eBay connecting buyers and sellers of goods ...