The Cold Start Problem

By Andrew Chen

Building a ‘Networked’ company from scratch is a difficult problem. Andrew Chen breaks it down into 5 simple steps with numerous examples of how the industry players went about doing it! It starts with building the first ‘atomic’ network to focusing on the ‘hard’ part and hustling on to tackle competition.

Analogy from Biology

The Allee threshold is a term form biology, below which a population might decline and not survive. Beyond this threshold, the population can thrive safely till the ‘carrying’ capacity of the system permits. Growth will flatline beyond that!

Similarly, a sustenance ‘threshold’ can be thought off for ‘networked’ technology industries – for e.g. Uber! As long as we are able to get an Uber with an ETA less than 15 min, the business may sustain. An ETA larger than that may render the service useless and boring!

The Cold Start Theory

The Cold Start Theory has been divided into 5 parts:

1.       The Cold Start

2.       Tipping Point

3.       Escape Velocity

4.       The Ceiling

5.       The Moat

The Cold Start Problem

It is critical to have the right network & content at the start – and this is difficult to begin with. And, that is called an atomic network. Atomic Network – create one stable, engaged self-sustaining network.

e.g. Zoom needs 2 users to function & be a useful proposition. It needs to have enough density & stability to break through early anti-network effects.

To build one atomic network requires a hodgepodge of different tools:

1.       Start with a ‘niche network’: Gather a ‘niche’ audience who use the product, rather that targeting the mainstream. As the product and network gets built, this is going to change. It will become more relevant to the mainstream as people and content gets added.

2.       The ‘atomic network’ hypothesis: Visualize what the ‘atomic network’ for the product will look like and try to build it, if required manually. The larger the number of users needed, the more difficult it is to build the atomic network. For teleconferencing products, this is easy! For a product like Workday (a HR tool), organizational selling is more appropriate.

The ‘Hard’ Side

There is a minority of users that create disproportionate value and hence hold disproportionate power in the atomic network. This is identified as the ‘hard side’ of the network. They contribute more to the network, but are harder to acquire and retain.

e.g. Uber drivers vs riders, developers vs users on an app store

If you look at majority of the social content applications –

1% create content (the hard side)

10% engage

100% benefit – (1/10/100 rule!)

Solving the ‘hard side’ – Building a ‘killer’ product that can attract more of the hard side!

The Tipping Point

Once the atomic network has been formed and you are able to see users on the platform – you will start to see the magic happen – The ‘Cold Start’ problem has been solved by the product!

The next step would be to take the network to the market:

a.       Invite-Only growth: Building a high-quality network

b.       Come for the tool, stay for the network – Instagram, WhatsApp

c.       Coupons – to start using the product

d.       Flintstoning – replace a missing product feature by manual human effort. e.g. Assume, you have launched an application to take and deliver orders from a set of restaurants. A certain restaurant initially refuses to sign up. You take orders from your customers on your application and manually fulfil these orders. This in turn creates and captures the order demand. Looking at the lucrative customer network, the restaurant eventually signs up!

Escape Velocity

When a product sees success & scale, it is often called ‘hitting escape velocity.’ This is the ‘end-state’ of the product. At this stage we can define the ‘network effect’ of the product in three parts:

1.       Acquisition – ability to attract new customers

2.       Engagement – ability to retain customers

3.       Economic – business model improvement, cost management, revenue maximization etc.

The Ceiling

At this stage the product growth stalls and the network effects weaken. We get to see markets getting saturated and the marketing channels stop performing. For networked products, the focus should always be to improve the ‘hard-side’ to drive more engagement and monetization.

You will also see networks revolt – e.g. the hard side demands better commissions and terms. The network will also get overcrowded – will lot of content scattered around. For services like You Tube, organization becomes an important aspect now.

The Moat

The final stage of the product maturity in this cold start theory. The underlying moto would – ‘once a product has established itself, it should be able to defend its position!’

(PS: this is a personal interpretation of the facts presented by the author)