The Cold Start Problem

The Cold Start Problem

The Cold Start Problem doesn't need to just be solved once; it needs to be dealt with over and over.

INTRODUCTION

This is definitely not another “growth” book, but rather an exploration into what makes networks thrive - or suddenly collapse.

Starting from the perspective of the network dynamics - Andrew Chen, a seasoned growth practitioner who’s now an investment partner at a16z - then applies “a growth mindset” to breaking down and even creating frameworks to help understand what drives growth within some of the most famous examples of high-growth networks.

Framing the content through the lens of “The Cold Start Theory”, Andrew goes on to breakdown multiple components of “network effects”, including:

  • The Cold Start Theory framework itself, featuring 5 stages: The Cold Start, The Tipping Point, Escape Velocity, Hitting the Ceiling, and The Moat
  • 3 types of network effects: Engagement, Acquisition, and Economics
  • The paradox of the Atomic Network, Native Users, Adjacent Users

A must read for any growth practitioner or founder looking to better understand the systems that underpin this class of business.

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FUTURENATIVE - THINK BETTER. BUILD BETTER.

I very occasionally send out an email recapping some thoughts, learnings and ideas typically centred around a thesis & approach I call being “FUTURENATIVE”.

In short, the thesis states: FUTURENATIVE individuals and organization find a unique way to leverage apparent tensions and blend both discovery & execution work, in order to unlock massive impact.

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KEY TAKEAWAYS

  • In its classic usage, a network effect describes what happens when products get more valuable as more people use them. The "effect" part of the network effect describes how value increases as more people start using the product.
  • The questions to ask are simple: First, does the product have a network? Does it connect people with each other, whether for commerce, collaboration, communication, or something else at the core of the experience? And second, does the abilIty to attract new users, or to become stickier, or to monetize, become even stronger as its network grows larger?
  • Most products these days are low technical risk-meaning they won't fail because the teams can't execute on the engineering side to build the products but they are generally also low defensibility. […] Larger competitors are often able to copy the product, but find it difficult to capture the network.
  • this framework Cold Start Theory named for the first and most important stage in building network effects. Cold Start Theory lays out a series of stages that every product team must traverse to fully harness the power of network effects. There are five primary stages:
    • The Cold Start Problem
    • Tipping Point
    • Escape Velocity
    • Hitting the Ceiling
    • The Moat
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  • If users don't find who or what they want, they'll churn. This leads to self-reinforcing destructive loop. In other words, in most cases the network effects that startups love so much actually hurt them. I call these "anti-network effects" because these dynamics are downright destructive-especially in the early stage as a company is getting off the ground. Solving the Cold Start Problem requires getting all the right users and content on the same network at the same time -which is difficult to execute in launch.
  • build the smallest possible network that is stable and can grow on its own. who are the first, most important users to get onto a nascent network, and why? And how do you seed the initial network so that it grows in the way you want?
  • It's a myth that network effects are all powerful and positive forces quite the opposite. Small, sub-scale networks naturally want to self-destruct, because when people show up to a product and none of their friends or coworkers are using it, they will naturally leave. What solves this? "The Atomic Network" -the smallest network where there are enough people that everyone will stick around. However, the most important part of any early network is attracting and retaining "The Hard Side" of a network-the small percentage of people that typically end up doing most of the work within the community. To attract the hard side, you need to "Solve a Hard Problem" design a product that is sufficiently compelling to the key subset of your network. When the Cold Start Problem is solved, a product is able to consistently create "Magic Moments." Users open the product and find a network that is built out, meaning they can generally find whoever and whatever they're looking for. The network effects kick in, and the market hits its Tipping Point as users start coming to you.
  • The higher the requirement, the harder it is to get started, but the more defensible the product is in the long run.
  • The solution to the Cold Start Problem starts by understanding how to add a small group of the right people, at the same time, using the product in the right way. Getting this initial network off the ground is the key, and the key is the "atomic network" the smallest, stable network from which all other networks can be built.
  • The atomic network is a complementary point of view to Clay Christenssen’s Disruption Framework. These small networks often grow in niches, slowly growing to take over the entire market. Chris Dixon, my colleague at a16z, summarized the idea: next big thing will start out looking like a toy." a appropriately, "The Disruptive technologies are dismissed as toys because when they are first launched they "undershoot" user needs. […] The next big thing will start out looking like it's for a niche network.
  • that's usually what we mean when we talk about 'markets," "segments," and "demographics"-the language of launching new networks should be focused on groupings of a handful of people, with the right intent, in the right situation, at the right time.
  • Even at the start of an atomic network, there is an important and surprising dynamic at play that only increases over time: there is a minority of users that create disproportionate value and as a result, a have disproportionate power. This the "hard side" of your network. They do more work and contribute more to your network, but are that much harder to acquire and retain.
  • the hard side must all be happy for the network to function. When they work, they generate what academics often call "cross-side network effects" when more users in one side of the network benefits the other side of the network.
  • This is often called the "1/10/100" rule, and it's no surprise that the 1 percent of highly engaged users is extremely valuable. For YouTube, Instagram, and other content-sharing platforms, there curve where the 20 percent of top influencers and is a "power law" up with the vast content creators end majority of engagement. They attract millions of followers, and make content that generates tens of millions of views.
  • It's important to focus on this tiny slice of users so that messaging, product functionality, and business model are all aligned to serve them. Without this group, the atomic network will collapse-a social network can't exist without its content creators, and a marketplace cant exist without its sellers.
  • how do you find a problem where the hard side of a network is engaged, but their needs are unaddressed? The answer is to look at hobbies and side hustles. […] What people are doing on their nights and weekends represents all the under utilized time and energy in the world. If put to good use, this can become the basis of the hard side of an atomic network.
  • Networked products are fundamentally different from the typical product experience they facilitate experiences that users have with each other, whereas traditional products emphasize how users interact with the software itself. They grow and succeed by adding more users, which create network effects, whereas traditional products grow by building better features and supporting more use cases.
  • When the product concept and value is simple to describe, it makes them easier to spread from user to user, much like the "meme" coined by noted biologist Richard Dawkins in one of my favorite books, The Selfish Gene.
  • In other words, the ideal product to drive network effects combines both factors: The product idea itself should be as easily understandable by anyone as simple as possible soon as they encounter it. And the same time, it should simultaneously bring together a at infinite network of users that is impossible to rich, complex, copy by competitors.
  • When a networked product finally starts to generate Magic Moments, it feels really good. Often, this is called "Product/Market Fit"
  • The Cold Start Problem doesn't need to just be solved once; it needs to be dealt with over and over.
  • the Tipping Point. This is where momentum starts to go in your direction, and strategies should be oriented around tipping over entire markets, rather than launching individual atomic networks one at a time.
  • From the earliest days, Reid's theory about professional networks was that, yes, a there was a spiderweb of connections, but there was also a hierarchy.
  • "Come for the tool, stay for the network" is one of the most famous strategies for launching and scaling networks. Start with a great “tool" product experience that is useful even for one user as a utility. Then, over time, pivot the users into a series of use cases that tap into a "network" the part where you collaborate, share, communicate, or otherwise interact with other users. […] The tool helps get to initial critical mass. The network creates the long term value for users, and defensibility for the company.
  • While establishing an initial network, it usually doesn't make sense for an under resourced startup to throw a lot of money around to get started. Instead, teams are often better to focus on basics, like figuring out the right target market, and creating the initial product features. You need to nail the killer product, and prove that you can gain an atomic network, before reaching for the financial lever.
  • Travis would regularly say to the product teams, "Product can solve problems, but it's slow. Ops can do fast." As a result, Uber saw itself as an "ops-led" company, and it was this team that best embodied the startup's entrepreneurial and creative culture. The hustle within the Ops team was renowned, and one of the foundational elements of Uber's success.
  • The Tipping Point for a market can be accomplished with some of the grand strategies I've discussed subsidizing markets, making the product invite-only, building tools, Flintstoning, etc.-but that's all built on raw creativity and entrepreneurship. Creativity is important because there are often brief moments of opportunity that can cause a market to quickly tip, if you try the right idea. Eventually, highly scalable efforts like SEO, paid marketing, viral growth, and partnerships have to kick in. However, in the early days, when the focus is on tipping each new additional network, everything helps.
  • But I argue that within the framework of taking a market from zero to the Tipping Point, these types of quick, clever tactics played a key role in getting markets off the ground. Most important, Uber created a system to quickly identify, execute, and iterate on these concepts.
  • Only three sourcing strategies account for every B2B company's very early growth. [These are: Personal network, Seek out customers where they are, Get press]
  • describe how the industry uses "network effects" as a broad term that is simply too vague to be useful. To make it concrete enough for product teams to act upon, argue that there are a trio of network effects: Engagement, Acquisition, and Economics.
    • 'The Engagement Effect" is what happens when a product gets stickier, and more engaging, as more users join. This is the closest to the classic definition of the network effect.
    • "The Acquisition Effect," on the other hand, is the network effect that powers the acquisition of new customers into your product in other words, viral growth.
    • "The Economic Effect." Network effects can help improve business models over time, in the form of improved feed algorithms, increased conversion rates, premium pricing, and more.
  • Active users are made up of a combination of new users signing up, and how engaged and retained the existing users are. Revenue is a by-product of active users and the average revenue each user is generating, whether that's from purchases or advertising revenue.
  • Networked products are unique because they can embed their viral growth into the product experience itself, This is the Product/Network Duo at work again, where the product has features to attract people to the network, while the network brings more value to the product.
  • In fact, it's the psychological elements, combined with the value proposition of a product, that make the best viral growth strategies difficult to copy. They are often unique to the product itself -making them proprietary and more defensible.
  • A network needs retention to thrive; it can't just continually add new users.
  • The Economic network effect is a powerful force that strengthens product's business model over time. It allows the leading network to more efficiently subsidize participation, increase conversion rates. and maintain premium pricing.
  • The Twitch team asked popular YouTubers to refer others that would want to try the new platform, and built a small base of streamers in time for their launch at E3 in 2011. This theory turned out to be wrong in the longer term, homegrown streamers on Twitch would come to dominate the network. The skills needed to be entertaining in real time are different than the skills needed to edit and upload videos. These Twitch-native streamers would ultimately turn into a defensive moat for the business, as this network prevented YouTube and other video platforms from coming into streaming as easily.
  • There's no way around maintaining a high growth rate besides continuing to innovate.
  • The Adjacent Users are aware of a product and possibly tried using it, but are not able to successfully become an engaged user. This is typically because the current product positioning or experience has too many barriers to adoption for them. In the framework of the Adjacent User, teams need to continually evolve their offering to attract the next set of sellers or creators to their platform.
  • The Law of Shitty Clickthroughs says every marketing channel degrades over time. This means lower clickthrough, engagement, and conversion rates, regardless of if you're talking about email, paid marketing, social media, or video.
  • All of these feedback loops create more concentration within a small number of players, but to the benefit of the entire network! A networked product generally wants to nudge its ecosystem toward professionalization, because it helps scale the hard side.
  • Professionalization happens in two ways: homegrown professionals, and off-network professionals.
  • When a network becomes large, rich, and diverse, it's often described as an "Economy' -you may have heard about the Gig Economy, the Attention Economy, the Creator Economy, and so on.
  • The hard side of the network is the most difficult and expensive to scale. As the market saturates, it eventually becomes more important to "scale up' than to continue to acquire new members of the hard side.
The key to investing is not assessing how much an industry is going to affect society, or how much it will grow, but rather determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors. - Warren Berger
  • First, I'll tell you what it's not: it's certainly not a contest to see who can ship more features. Instead, it's often the dynamics of the underlying network that make all the difference. […] it's a combination of harnessing network effects and building a product experience that reinforces those advantages.
  • Effective competitive strategy is about who scales and leverages their network effects in the best way possible. If every product in a category can rely on their network, then it's not about who's initially the largest. Instead, the question is, who is doing the best job amplifying and scaling their Acquisition, Engagement, and Economic effects.
  • it's much harder to solve the Cold Start Problem with a slower pace of execution, risk aversion, and a "strategy tax" that requires new products to align to the existing business.
  • Every dominant network might seem invincible, but the networks-of-networks framing argues that some parts of the network are weaker than others. Some are serving their customers well, and others are ready for a better product to emerge. There is an upstart's advantage they can cherry-pick the one really attractive use case that's the most valuable and poorly defended by an incumbent.
  • If you integrate too closely with a preexisting network, allowing them to control your distribution, engagement, and business model, you become just a feature of their network.
  • the core framework of this book-starting with smaller, atomic networks and tapping into its network forces to grow into a larger one-sounds counterintuitive. […] but here’s the paradox: to build a massive successful network effect, I argue that you must first start with a smaller, atomic network
  • When networked product takes competition seriously, it has to collect metrics to figure out the comparative position of all the players in the market. This in turn allows product teams to experiment and while keeping execute, an eye on results--it allows them to set goals, not only against their product's success, but also their competitors' declines.
  • any product that's in a head-to-head race with competitors should track the outcomes-market share, active users, engagement, or otherwise--while they execute in the market, to put together cause and effect.
  • bigger networks are fearsome not just because of the inherent network effects that come with scale, but also because of their ability to expand into new categories and markets. Using their preexisting network as a launching pad, they can--at least theoretically--quickly solve the Cold Start Problem and establish traction for a new product. This is often called bundling.
  • Going back to Microsoft, part of their competitive magic came when they could bring their entire ecosystem developers, customers, PC makers, and others to compete at multiple levels, not just on building more features. And the most important part of this ecosystem was the developers.

FUTURENATIVE - THINK BETTER. BUILD BETTER.

I very occasionally send out an email recapping some thoughts, learnings and ideas typically centred around a thesis & approach I call being “FUTURENATIVE”.

In short, the thesis states: FUTURENATIVE individuals and organization find a unique way to leverage apparent tensions and blend both discovery & execution work, in order to unlock massive impact.

You can sign up here to learn more:

SEE MORE POSTS

  • More recently, , CEO and cofounder of , described his understanding of the for Snap and Instagram, versus :
    • You can imagine a pyramid, if you will, of internet technology or communications technology, where the base of the pyramid-the very broad base-is self-expression and communication. And that's what Snapchat is really about. Talking to your friends, which is something everyone is comfortable doing. They just express how they feel.
    • As the pyramid gets narrower, you have the next layer, which is status. Social media in its original construct is really about status, representing who you are, showing people that you're cool, getting likes and comments. Those sorts of things. And that's less accessible to the broad base of humanity, and has a narrower base of appeal. There's more limited frequency of engagement, because people only do some things that are cool once a week or once a month, and not every day.
    • At the top of the pyramid, which think is represented by TikTok, is really talent. People who have spent a couple hours learning a new dance, or think about a funny new creative way to tell a story. They're really making media to entertain other think that's even narrower.... 20 people.