What should platform/marketplace companies disclose about network effects?

Full Explanation

A marketplace founder claims "we have network effects—supply and demand both grow exponentially." Investor asks: "Prove it. What happens when you double supply? Does demand double?" Often, the answer is no—growth is linear, not exponential. Honest network effect disclosure: 1) Define what network effect actually exists (two-sided matching? User network increasing value?). 2) Measure growth drivers: is growth driven by supply growth, or organic demand? 3) Test supply-side elasticity: if you add 2x suppliers, do bookings increase materially? If not, you don't have network effects—you have supply constraints. Example honest disclosure: "Our marketplace has modest network effects in certain verticals. In luxury resale, increasing seller supply by 50% drives buyer growth of 25%—sub-linear. In mainstream fashion, the effect is stronger: +50% supply drives +45% buyer growth. We've identified that success depends on category-specific liquidity management. We're not yet seeing pure viral growth; growth currently requires managed supply incentives." This is credible because it's specific and acknowledges reality. Claiming network effects without proof signals either naivety or dishonesty. Investors specifically test: ask for cohort growth data showing if demand grows organically with supply, or if you're managing both sides artificially (which doesn't scale).

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