The Cold Start Problem

How to Start and Scale Network Effects

By: Andrew Chen

Narrated by: Andrew Chen

A start-up executive and investor draws on expertise developed at the premier venture capital firm, Andreessen Horowitz, and as an executive at Uber to address how tech’s most successful products have solved the dreaded "cold start problem” - by leveraging network effects to launch and scale toward billions of users.

Although software has become easier to build, launching and scaling new products and services remains difficult. Start-ups face daunting challenges entering the technology ecosystem, including stiff competition, copycats, and ineffective marketing channels. Teams launching new products must consider the advantages of “the network effect”, where a product or service’s value increases as more users engage with it. Apple, Google, Microsoft, and other tech giants utilize network effects, and most tech products incorporate them, whether they’re messaging apps, workplace collaboration tools, or marketplaces. Network effects provide a path for fledgling products to break through, attracting new users through viral growth and word of mouth.

Yet most entrepreneurs lack the vocabulary and context to describe them - much less understand the fundamental principles that drive the effect. What exactly are network effects? How do teams create and build them into their products? How do products compete in a market where every player has them? Andrew Chen draws on his experience and on interviews with the CEOs and founding teams of LinkedIn, Twitch, Zoom, Dropbox, Tinder, Uber, Airbnb, and Pinterest - to offer unique insights in answering these questions. Chen also provides practical frameworks and principles that can be applied across products and industries.

The Cold Start Problem reveals what makes winning networks thrive, why some start-ups fail to successfully scale, and, most crucially, why products that create and compete using the network effect are vitally important today.

©2021 Andrew Chen (P)2021 HarperCollins Publishers

Entrepreneur Essential

Accessible case studies expand on a functional characterization of “network effects.” Useful anecdotes for entrepreneurs to digest and apply when evaluating firms and markets. Great pain and steep losses might be avoided by a thorough reading of this text.

One of the best new entrepreneurship books in a while!

I have read many entrepreneurial books, and haven’t seen something so fresh and new (in terms of ideas) in a while. A great read.

Eye opening!

Quite enlightening and insightful walk through of concepts and practical advice. Treasure trove for anyone who aspires to design to scale. Loved it!

Wow

Super informative and helpful. I will be using this in the future for sure. 5 stars

Former uber an VC telling real examples

The book is written by Andrew Chen, a former Uber executive and VC. Very interesting on how he uses several practical examples. Interviewed more than 100 people for 2-3 years to write this book as he believes that the literature on this topic is not good and is better to learn from real examples.
Starts by mentioning his role at Uber, how they used to look at the network effect on a city level (consolidated numbers they never used as a KPI) and how they scaled to billions users.
He also mentioned that he used to study biology and how the animals also used network effects to survive (protect, warning, food, etc). Interesting fact about the telephone being one of the first network effect companies.

He divides the path to create and scale into 5 parts:
The cold start problem
The tipping point
Escape velocity
The ceiling
The Moat

Network effects are defined by your product being more valuable as more people use it.

The cold start problem. In this chapter he mentions Tiny Speck (former slack, and how it pivoted from a
failed game), credit cards (Bofa example on mailing 60k free cards and registering several merchants), Wikipedia, Tinder, Zoom and clubhouse. Very important to find the minimum stable group to make your product work. In zoom, CEO mentions 2 people, slack a group less than 10 people (but actively using, from the same team, etc), Airbnb more than 300 listings, Uber less than 3 minute ETA. After finding this minimum, which could be called the atomic network, you go to adjacent network (Facebook - other colleges, credit card- adjacent cities).To solve the cold start, it need to have both sides of supply and demand and usually there is a hard side (youtube - content developer, uber - drivers, marketplace - merchants, tinder - woman and usually the more attractive).

The tipping point. This part the author mentions several examples like tinder (that after finding an atomic network in a college party they sponsored - influential people, needed to download the app before getting into the party, and wanted to contact some people on the next day - they expanded using the same strategy), linkedin (that used the invite only strategy - others like gmail and facebook also did the same), Instagram (“Come for the tool, stay for the network” - other examples of this strategy is dropbox, google suite - build a good tool, that an individual can use and them create a network behind it - thats is why a competitor photo app had not the same success as instagram), Paypal (paying up coupons strategy), Reddit (“Flintstoning” - I really liked this term, basically is mentions the car that Fred used his own feet as the motor - the parallel here is as reddit did at the beginning when they created their own links to be posted instead of automatic or people form the community - basically its things that are done “manually” at the beginning to get the network some traction. Other examples are content, food delivery where the restaurants were not yet registered on the platform and someone made the pickup as it was the final client, etc) and also mentioned Uber (“always be hustlin”).

Escape velocity. In this chapter also some good examples. Dropbox, Paypal, credit bureaus and made an interesting parallel with a disease (scurvy). This disease impacted some crews in ships during the past and a doctor made the random test in separate groups. This is the same idea on analyzing cohorts. Author mentioned some metrics like the ratio of new invites (Ex: 1000 people convert 500, that converts 250 - ratio of 0,5) and also ratios related to engagement (% of people that uses after 1 day, week, etc - also mentioned that a “smile” curve is not usual and could be a good point of a good app/service/etc).

Ceiling. In this chapter the author mentions the T2D3 (rocket ship growth) - triple, triple, double, double, double. Define a goal (Ex: IPO, M&A, purpose, etc) like an IPO. to get there you need a ~$ 1 billion valuation. Peers have a 10x revenues implying an ARR of $ 100mm. To get there the first 1-3 years you need to find the product market fit and get to $2 mm ARR. Then triple to $6 mm, triple to $18mm, double to $36 mm, double to $72 mm and finally double it to more than $100 mm. Also mentions that when hitting the ceiling (which is good news, given that you have a good product/service) you need to find new adjacent markets and it has different strategies. Instagram had 400 mm users when it hit the ceiling and the next adjacent were 35-45 year US women and needed a different strategy. Then it was woman in Jacarta with a prepaid phone. Author also mentioned twitch and ebay. These cases you needed new layers of growth. In ebay case, it was the “buy now button” at some point. You can also go to other regions and new services to continue the exponential growth. Of course each has specific points to address, given that a new path has a higher probability of failing (like VCs investments).Also very good points of problems when hitting the ceiling. Value of the product might be reduced when the network revolts (Uber drivers that made ~40% of the rides protested - and in this case there is a necessity of caring about the hard part of the network - same case of content producer in a predecessor of youtube) and also the overcrowding (Adds and email messaging reduced dramatically their value due to spam). Youtube has several mechanisms to curate the content, AI, etc.

The moat. This term came from Warren buffet, and describes companies with clear and sustaining competitive differentials and high barriers to entry. This chapter mentions strategies like cherry picking (Airbnb choosing rental sector from craigslist) which basically chooses a specific market which is not being fully attended (Snap didi it with photos from facebook). Another thing is to compete over the hard side (Uber example with riders). Also very interesting points on competition (Airbnb vs wimdu, google plus vs facebook). In the case of google, it mentioned why sometimes bundling and having a big bang start might not be good if the product is not yet created atomic networks. A successful example was Microsoft with internet explorer and the office package.

Game Changer

Reading this book has been a game changer. I'm in the early stages of building a marketplace and it feels like Andrew is laying out actionable items that will make an instant impact. Thank you for sharing!

Helpful for startups w network effects

Many great real world examples of the different stages a startup goes through that have network effects. I like how he is able to define the different stages and dissect them individually.

Can take some out of this book and apply it to your own venture.

Atomic networks key.

Insightful & Captivating

As an early stage startup founder, I only wish there were dozens more books like this. Tactical breakdowns of how the world’s best startups came to be, written with page turning stories of the “glory days” at Uber. The combo of the two make you feel like you’re part of the story, which has a multiplier effect on comprehension.

One of the best Network Effects books.

Loved it! This is one of the best Network Effects books out on the market today. Gives many real life industry examples and angles to what Network Effects look like in the market today. Breaks down Network Effects into a simpler understanding to the concept. Must read or listen if interested in this type of subject matter!

Incredible

Sober submission of how science actually works wrt hydrocarbons, a multiple time listening candidate. Highly recommend