The Cold Start Problem - Andrew Chen  ## Metadata - Author: **Andrew Chen** - Full Title: The Cold Start Problem - Category: #books ## Highlights - In its classic usage, a network effect describes what happens when products get more valuable as more people use them. ([View Highlight](https://read.readwise.io/read/01h6myvbj1dwk65k6bt8njvw0n)) - *Tinder started by making everyone connect their Facebook, so that we could show the number of mutual friends you had, which built trust. We also made it so that you could only be matched with people who lived around you—we used the GPS location from your phone, which was new. These were people with mutual friends living around you, the sort of person you might meet in real life! Connecting with Facebook also made sure you would never be shown to friends, or vice versa, if you were worried about that. This all created trust. Tinder also had built-in messaging so that you didn’t have to give out your number. If the conversation didn’t go anywhere, you could just unmatch without worrying about getting harassed.* ([View Highlight](https://read.readwise.io/read/01h4v4py2xhstn0bxjv4akfyyz)) - It was during my second year as a venture capitalist, and I valued the company at what seemed like an outrageous sum—nearly $100 million—when it was just two employees. ([View Highlight](https://read.readwise.io/read/01h8af4ev5dpwdjb8j8ceefp2c)) - The Magic Moments started to happen all the time so that every time you opened the app, there was something worth listening to. ([View Highlight](https://read.readwise.io/read/01h8af6jv24f51aqj0d5ktv2n7)) - At Uber, we called these moments Zeroes. A zero at Uber was the worst experience you could have, when a rider opens the Uber app with the intent to pick an address and pick up a ride—but there aren’t any drivers in the area! This is a zero. ([View Highlight](https://read.readwise.io/read/01h8ag5am8rxg4mkp9t5g2yv1p)) --- publish: true aliases: [Andrew Chen,The Cold Start Problem] --- The Cold Start Problem - Andrew Chen  ## Metadata - Author: **Andrew Chen** - Full Title: The Cold Start Problem - Category: #books ## Highlights - In fact, just take a look at the companies that have made it into the “Billion Users Club.” Apple has 1.6B iOS devices, while Google has 3B. Facebook has 2.85B users across their social network and messaging apps. Microsoft has over 1.5B devices running Windows, and another 1B running Office. In the Chinese technology ecosystem, the companies behind WeChat, TikTok, and AliPay all enjoy ecosystems numbering a billion users each. ([View Highlight](https://read.readwise.io/read/01jh734wknp48kfqsdbab6tvem)) - Yet the ideas that dominated dot-com thinking still exist. The tech industry still talks about winner-take-all markets and first mover advantages, when in practice, these are myths and in practical terms have been disproven. ([View Highlight](https://read.readwise.io/read/01jh73z01zk055q3c5rq0vf1qh)) - Most new networks fail. If a new video-sharing app launches and doesn’t have a wide selection of content early on, users won’t stick around. The same is true for marketplaces, social networks, and all the other variations of consumer (and even B2B) products—if users don’t find who or what they want, they’ll churn. This leads to a self-reinforcing destructive loop. ([View Highlight](https://read.readwise.io/read/01jh76j1tqhqg5kb2r0fd3tfgh)) - It takes an enormous amount of effort to build the first atomic network, but it’s obviously not enough to just have one. To win a market, it’s important to build many, many more networks to expand into the market—but how does this happen, at scale? ([View Highlight](https://read.readwise.io/read/01jh76k61nnbrhqxqz2rgmqvk0)) - This is where the classical definition of a “network effect” is wrong. I redefine it so that it’s not one singular effect, but rather, three distinct, underlying forces: the Acquisition Effect, which lets products tap into the network to drive low-cost, highly efficient user acquisition via viral growth; the Engagement Effect, which increases interaction between users as networks fill in; and finally, the Economic Effect, which improves monetization levels and conversion rates as the network grows. ([View Highlight](https://read.readwise.io/read/01jh770vckjsjcwa7vhyz8fjvb)) - Because all products in a category likely have the same type of network effects, competition ends up being asymmetrical while leveraging the same forces. A larger network and a smaller network in any given market have distinctly different strategies—think of it as a David strategy versus a Goliath strategy. The upstart has to pick off niche segments within a larger network, and build atomic networks that are highly defensible with key product features, and, when applicable, better economics and engagement. The incumbent, on the other hand, uses its larger size to drive higher monetization and value for its top users, and fast-following any niches that seem to be growing quickly. ([View Highlight](https://read.readwise.io/read/01jh77nbjjvd4w4qvdr1h5jn6s)) - Humans are the networked species. Networks allow us to cooperate when we would otherwise go it alone. And networks allocate the fruits of our cooperation. Money is a network. Religion is a network. A corporation is a network. Roads are a network. Electricity is a network. ([View Highlight](https://read.readwise.io/read/01jh77v7zyb0r87xz1x9n0srea)) - Networks must be organized according to rules. They require Rulers to enforce these rules. Against cheaters. And the Rulers of these networks become the most powerful people in society. ([View Highlight](https://read.readwise.io/read/01jh77w98hscdavajatgjk0acf)) ## New highlights added January 17, 2025 at 7:46 AM - The key insight in the stories of Homobiles or Tinder is—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. ([View Highlight](https://read.readwise.io/read/01jhtcchzcr288vq23n8tfrc68)) ## New highlights added January 21, 2025 at 6:46 AM - In the classic 1960s animated sitcom *The Flintstones*, we see a prehistoric family sitcom set in the city of Bedrock. The show follows Fred and Wilma Flintstone and their loving family, complete with a pet dinosaur, a cave house, and a job that requires Fred to wear a tie. Memorably, there’s a car made of stone, furs, and timber—started up by a flurry of Fred’s legs—which rolls the family to their destination. Yabba dabba doo! “Flinstoning” is a metaphor for this car, except in software, where missing product functionality is replaced with manual human effort. Early product releases often go into beta while lacking simple features like account deletion, content moderation tools, referral features, and many others. ([View Highlight](https://read.readwise.io/read/01jj4m6kwvzkpbdjsjmt2t351h)) - Reddit’s use of Flintstoning is similar to the strategy used by companies like Yelp and Quora—to fill in the hard side of the network, which were also content creators. Study the pattern of Flintstoning across industries and you’ll see the focus tends to be on replicating the hard side of the network with employees, contractors, and other direct efforts. ([View Highlight](https://read.readwise.io/read/01jj4m68s593qj5k20jt3s4knv)) - The downside of Flintstoning is that it feels like it’s overly manual. You start by throwing people at the problem, but can it scale? I argue that it scales further and longer than you might think. Flinstoning can be thought of as a spectrum: • Fully manual, human-powered efforts • Hybrid, where software suggests actions to take, but people are in the loop • Automated, powered by algorithms ([View Highlight](https://read.readwise.io/read/01jj4m611msq7mr2r9xg7qmxa5)) - Yet the track record speaks for itself—growth teams have emerged across the industry as a focused way to scale products toward Escape Velocity. ([View Highlight](https://read.readwise.io/read/01jj4mgg8jq52mjtj521zjsegj)) - Combined with the natural virality of this media type, Dropbox embarked on a road map of photos-related features, culminating in the launch of Carousel, a separate app to let consumers manage and view their photos on Dropbox. It did okay, but underperformed relative to expectations and was eventually shut down so that the company could invest in what is now its core focus: businesses. ([View Highlight](https://read.readwise.io/read/01jj4mpy4sxxr786nrwxczy38m)) - The company’s focus on businesses came from multiple directions. First, the team surveyed users and realized that many High-Value Actives were upgrading their Dropbox accounts for use at work. It was much easier to sell to businesses—again, fishing in your own pond—especially once Dropbox built out features that companies expected: additional security and administrative controls, integrations into commonly used workplace products like Microsoft Office, and so on. Later on, the same analysis on popular files stored on Dropbox was performed, but led to a different conclusion once the focus was on which types of files were at the center of user engagement. ([View Highlight](https://read.readwise.io/read/01jj4mqj1jxewma1cpwq7zsryk)) - At its IPO filing documents, it would describe its mission along these lines: “Unleash the world’s creative energy by designing a more enlightened way of working.” It would describe itself as “a global collaboration platform.” This was a long way from the founding of the company, which was really driven by consumer demand—not necessarily business use cases. The origin story is now part of startup lore: Drew Houston was a student frustrated by misplacing his USB drives, and to solve this problem for himself, he built and launched Dropbox. The product was launched with a self-narrated, four-minute video*[49](private://read/01jgz2dee2bg8ke4g3ngp9dcv4/#fn49)* showing a “magic folder” that automatically synced files across computers, obviating the need for fragile USB drives. ([View Highlight](https://read.readwise.io/read/01jj4mt04qkvnnsvytqntke6ds)) - When new products see success and start to scale, it’s often called hitting “Escape Velocity.” The mythology is that the product begins to hockey stick, going up and to the right forever. But it’s not so simple—in reality, the journey isn’t over and instead the focus changes. In this phase, the challenge quickly becomes maintaining a fast growth rate and amplify a successful product’s network effects. ([View Highlight](https://read.readwise.io/read/01jj4mxc4j9gs0am7p08ekdxca)) - I argue that there are a trio of network effects: Engagement, Acquisition, and Economics. The following chapters deep dive on each of these effects. ([View Highlight](https://read.readwise.io/read/01jj4n0fmd3gzjer2g4qrf4stq)) - “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, as defined by Theodore Vail of AT&T. However, I’ll describe it in modern terminology, using the language of retention curves and engagement metrics that we use in dissecting the performance of new apps. ([View Highlight](https://read.readwise.io/read/01jj4n1kdyh6xshxn8thxczwhp)) - “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. Products are inherently viral when people bring their friends and colleagues into a network simply by using it—as Dropbox, messaging apps, and social networks do. I’ll talk about how the Acquisition Effect works, and how to best amplify its impact. ([View Highlight](https://read.readwise.io/read/01jj4n23npdkbc9ctkysm2xd19)) - “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. ([View Highlight](https://read.readwise.io/read/01jj4n26eeyz5f7v6g4hxqmts8)) ## New highlights added January 22, 2025 at 11:56 AM - Of course, after year 10, the company might still be growing quickly, though it’s more common for it to be growing 50 percent annualized rather than doubling. The argument is that products with network effects both can see higher growth rates as they tap into the various network forces I’ve discussed, and can compound these growth rates for a longer period of time—and looking at the data, I think that’s generally true. You might say, well, I don’t care about being a $1 billion company—I’m okay to shoot for $500 million. Or perhaps you want to build a $10 billion company, but do it over fifteen years. Great—then do your own calculations and tweak the numbers to devise your own trajectory. These can become goals for the team. For those seeking venture capital, it is a pretty standard minimum bar to get to $1 billion in valuation over ten years, but there’s no reason why it couldn’t be dialed down if the plan is to bootstrap a business or to only use angel investment. ([View Highlight](https://read.readwise.io/read/01jj7r4d2pdz3k0j9784w0er3j))