This is a summary of the book “The Cold Start Problem” written by Andrew Chen and published by Harper Business 2021. The author is a general partner for Andreessen Horowitz who explores the network effects behind the growth and success of several companies such as Reddit, Microsoft, Uber, YouTube and Craigslist. He presents a detailed study of network effects with examples and insights. A startup in the planning stage will find many useful tips in this book. Once a startup reaches “escape velocity”, Chen provides guidance for strong results.

Network effects stand in contrast to product feature developments. Traditionally, makers of technology goods have focused on building more and better features based on how users use their products. Instead, networked products focus on user interactions and grow by attracting more users. There are three types of network effects that can drive a product’s success:

1.       The acquisition effect where user population increases through viral growth, building the company’s economic base.

2.       The engagement effect is where users increase their involvement as the network expands. When the products scale, re-engaging lapsed users become a powerful driver.

3.       The economic effect  where growth kicks in as monetization and revenue per user increases.

Ecology may provide a framework for understanding network growth. A critical mass or “Allee Threshold” which is the “Tipping point” is the critical number in a social animal group. Below this number, survival prospects wane.

Growing a user base is a different focus than building software. An established competitor can duplicate the features of a startup by capturing its network in another matter altogether. Network effects impel growth and provide competitive advantage.

Losing initial customers because the new product lacks customers is called the cold start problem. For example, the number of rideshare drivers in a city is critical. If riders must wait for half an hour for a ride, the rideshare company is not providing value. Adding more drivers increases customers.

Networked products focus on experiences that users have with each other while traditional products focus on how users interact with the software itself. Cold start problem can be overcome by building an “atomic network” before we launch a new product. An atomic network is the smallest possible self-sustaining network. Building the first network for a startup can be hard but their mainstream relevance  even if not apparent, has significance. For example, Tiny Speck was building a game with remote workers who communicated using an archaic Internet Relay Chat technology. Although their game was not successful, it enhanced and adapted its chat tool and named it Slack. The CEO asked friends at other companies to try Slack and while most of them were startups themselves,  Slack’s client network expanded and the product gained more features. When it made its debut, the company earned 8000 companies. Within a year, it had 135000 paid subscribers and up to ten thousand daily signups.

Assets also fuel networks. Gaining drivers of competing rideshare companies helped one company gain advantage over another. Even dating apps look for attractive people as assets for match making. When a new product succeeds, considering who uses it and how they differ from category to category is important. Marketplaces such as eBay and Airbnb must have sellers. The supply of goods being sold must precede and sustain buyer demand.

Network effects happen only on a scale. Zoom, for example, improved incumbents by letting people join with a link and providing high-quality video. When a few people adopted Zoom, it quickly expanded virally. Strategies for building networks include “invite only”, “come for the tool”, and financial incentives. The invite-only feature fueled LinkedIn’s explosive growth. Financial incentives date back to 1888 when Coca-cola offered a coupon for a free coke. The author says hustle and creativity help tip over markets because each atomic network is not the same. Also, when a product reaches scale, negative forces may impede further expansion. Forces that undermine growth include churn, market saturation, regulatory measures, trolling, spamming and fraud. Networks also suffer from overcrowding. Applying algorithms that optimize use according to engagement may result in controversial content and new competitors may try cherry-picking from an incumbent. Finally, growth does not continue forever. But network effects are powerful, and they are undeniable drive factors for growth and success.