The Cold Start Problem: How to Start and Scale Network Effects

by Andrew Chen

I began to research and to write The Cold Start Problem because I found my own understanding of the dynamics of networks to be unforgivably shallow for something so core to the technology industry. The network effect is something I’ve seen firsthand at Uber, and yet I lack the vocabulary and the frameworks to articulate the deep nuances.

There should be a set of universal concepts and theories to talk about network effects, regardless of their product category.

a network effect describes what happens when products get more valuable as more people use them.

A telephone without a connection at the other end of the line is not even a toy or a scientific instrument. It is one of the most useless things in the world. Its value depends on the connection with the other telephone and increases with the number of connections.

A successful network effect requires both a product and its network,

Consumers watch more than a billion minutes per day of video uploaded by millions of individual creators, businesses, and media properties.

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.

Although the networks don’t own their underlying resources, it’s the connection that matters. The entire ecosystem stays on because the value is in bringing everyone together. That’s the magic.

how do you tell if a product has a network effect, and, if yes, how strong is it? 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?

second, does the ability to attract new users, or to become stickier, or to monetize, become even stronge...

It’s not enough to be a good, useful app—they have to actively take away attention from other hyperaddictive apps that have been optimized over years to engage users.

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. When something works, others can follow—and fast.

Larger competitors are often able to copy the product, but find it difficult to capture the network.

The law is defined below: The systemic value of compatibly communicating devices grows as a square of their number

Anyone who’s ever actually built a networked product from scratch will tell you that unfortunately, Metcalfe’s Law is painfully irrelevant. Although clever for its time, it has not aged well.

there’s only so many resources—like the meerkat favorites, bugs and fruit—to support a finite population. As the population increases, eventually there is a natural limit based on the environment—often called a carrying capacity. For social animals like meerkats and goldfish, overpopulation looks like this, starting flat, then hitting a tipping point before growing quickly and then saturating and falling once again:

The network effect version of this in the technology industry happens when there is “overcrowding” from too many users. For communication apps, you might start to get too many messages. For social products, there might be too much content in feeds, or for marketplaces, too many listings so that finding the right thing becomes a chore. If you don’t apply spam detection, algorithmic feeds, and other ideas, quickly the network becomes unusable. But add the right features to aid discovery, combat spam, and increase relevance within the UI, and you can increase the carrying capacity for users.

Cold Start Theory lays out a series of stages that every product team must traverse to fully harness the power of network effects. The curve represents the value of the network as it builds over time, and is shaped as an S-curve with a droop at the end.

There are five primary stages: The Cold Start Problem Tipping Point Escape Velocity Hitting the Ceiling The Moat

a rapidly growing network wants to both grow as well as tear itself apart, and there are enormous forces in both directions.

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.

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.

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.

What solves this? “The Atomic Network”—the smallest network where there are enough people that everyone will stick around.

the most successful network effects–driven apps are also sometimes dead simple. They eschew a long list of features and instead emphasize the interactions among people using the app.

Anti-network effects are the negative force that drives new networks to zero.

In a recent analysis by Andreessen Horowitz of the top 100 marketplace startups, just four of the top products drive 76 percent of all the gross revenue—there

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.

If you can create one stable, engaged network that can self-sustain—an atomic network—then likely you can build a second network adjacent to the first one.

On September 18, the bank mailed 60,000 Fresno residents a BankAmericard. There was no application process. The card simply arrived in the mailbox, ready to use. Credit card fees for merchants were set at 6 percent and consumers received between $300 and $500 in instant credit. There was a certain brilliance behind the 60,000-person drop: On day 1, cardholders simply existed.

The networked product should be launched in its simplest possible form—not fully featured—so that it has a dead simple value proposition. The target should be on building a tiny, atomic network—the smallest that could possibly make sense—and focus on building density, ignoring the objection of “market size.” And finally, the attitude in executing the launch should be “do whatever it takes”—even if it’s unscalable or unprofitable—to get momentum, without worrying about how to scale.

Once a single atomic network can be built, it becomes straightforward to build many others by repeating the same playbook.

The atomic network is a complementary point of view to Clayton Christensen’s Disruption Theory. These small networks often grow in niches, slowly growing to take over the entire market.

there is a huge benefit to picking a smaller and more targeted starting point. Nail this initial niche network, establish an atomic network, and grow from there. In other words: The next big thing will start out looking like it’s for a niche network.

The first step to launching an atomic network is to have a hypothesis about what it might look like. My advice: Your product’s first atomic network is probably smaller and more specific than you think.

It was similar for Uber, whose networks we tend to talk about as “San Francisco” or “New York,” but in the earliest days, the focus was on narrow, ephemeral moments—more like “5pm at the Caltrain station at 5th and King St.”

The general managers and Driver Operations had an internal tool, called Starcraft—referring to the real-time strategy game popular at the time—that allowed them to click on a group of cars, text them “Go to the train, lots of riders!” and direct them in real time.

there is a minority of users that create disproportionate value and as a result, 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.

A successful new product should be able to answer detailed questions: Who is the hard side of your network, and how will they use the product? What is the unique value proposition to the hard side? (And in turn, the easy side of the network.) How do they first hear about the app, and in what context?

For users on the hard side, as the network grows, why will they come back more frequently and become more engaged? What makes them sticky to your network such that when a new network emerges, they will retain on your product?

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.

Networked products must balance the needs of multiple sides of a network—not just buyers, but sellers, too. Not just content creators, but viewers as well. And the most important features in networked products often revolve around how users find and connect with each other,

it isn’t until later, as the product hits scale, that the engineering teams are upgraded.

many early investors balked at the fact that Zoom was tackling what they perceived as a solved problem. The commonality between all these networked products is that they offered novel ways for people to interact, and over time, the network became the defensibility.

the ideal product to drive network effects combines both factors: The product idea itself should be as simple as possible—easily understandable by anyone as soon as they encounter it. And at the same time, it should simultaneously bring together a rich, complex, infinite network of users that is impossible to copy by competitors.

many of the most valuable products in the world have a business model that emphasizes “free.” Social networks and communication apps are free, and SaaS products tend to be freemium. Marketplace companies are free to browse and use, though obviously buying services or products cost money.

Offering a free tier is a recurring theme for many networked products: some are ad-supported (as video and social media platforms are), others have premium features unlocked by subscription (as with more workplace/B2B products), and others are powered by microtransactions (as with marketplaces, games, and livestreaming platforms).

It’s hard enough to build an atomic network; why make it even harder by erecting barriers?