The Cold Start Problem

Books · Source

Overview

Solid read that talks about how to start and sustain network-based startups. Much of the framework was explained in the first 10% of the book, with the rest of the 90% giving concrete examples of the framework applied to practice.

The first part of the book is relevant for everyone who is interested in the space, while the rest of it is relevant mostly for people working as operators in a network-driven company.

Network effect = product gets more valuable with more users. In the dot-com boom, companies used Metcalfe's law (value of a network increases as a square of its number of nodes) as a way to justify valuations. This created FOMO. "Buy in early, and buy in soon, because the value of the network will soon explode in a fast growing startup". But this is an insufficient tool

The Cold Start Theory is the author's framework for thinking through a network's growth. He postulates that there are 5 stages of a network, which are:

  1. The Cold start problem: getting the right products and content on the same network at the same time. The problem to solve here is "how to get to the smallest possible network that can sustain and grow on its own". For this, need to have a dead simple (to use) product that still solves a sharp pain point in order to get initial users . The next big thing often looks like a toy that’s built for niche networks. Super important to start with a niche. Only then can you scale to other, larger, mainstream networks (by incorporating learnings from niche networks and improving products). On the product side, it's important to focus on feedback loops here. What are the status, utility, and emotional feedback loops that you can build into your product?

  2. The Tipping Point: what are the small networks you can start with to eventually get to a tipping point surging that network, and then into the larger ecosystem? For Tinder, this was colleges in the US and call centers in India. You can use many approaches to this – focused launch parties, an invite only approach, "come for the tool, stay for the network", Flintstoning, and others

  3. Reaching escape velocity: consists of 3 things. The acquisition effect (can you get lower CAC with viral growth), the engagement effect (can you increase interactions in product as the network grows), and the economic effect (increases monetisation and conversions as the network grows). The 3 are interlinked

  4. Dealing with issues as you hit the ceiling: CAC can spike due to market saturation and slowing viral growth. Other negative effects (like overcrowding and unpleasant interactions) can also manifest

  5. The Moat: network based competition is a double edged sword, because other startups can take away your customer with the same tactics as you used to acquire them. What other moats can be built to work around this?