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

by Andrew Chen

The fate of Google+ was sealed in their go-to-market strategy. By launching big rather than focusing on small, atomic networks that could grow on their own, the teams fell victim to big vanity metrics. At

network effects rely on the quality of the growth and not just its quantity.

conferences, or advertising is that while it might generate a large spike of users when successful, it is necessarily untargeted. Instead you are likely to get a smattering of users from across many networks, which might then churn out if the network around them isn’t built.

You’d rather have a smaller set of atomic networks that are denser and more engaged than a large number of networks that aren’t there. When

networked product depends on having other people in order to be useful, it’s better to ignore the top-line aggregate numbers. Instead, the quality of the traction can only be seen when you zoom all the way into the perspective of an individual user within the network.

This was a popular, early reaction to the business, by venture capital firm Bessemer Ventures: “Stamps? Coins? Comic books? You’ve GOT to be kidding,” thought David Cowan. “No-brainer pass.”88 Fred

these was the largest network, and yet they lost. The eventual winners in these product categories were not the first to market, nor did they invent most of the underlying mechanics, but they still upended the big guys.

network effects are so powerful, why are the larger networks so vulnerable? And what does an effort to take on an upstart look like?

Uber’s War Room, where the competitive strategy was set for the company’s various regional business units. A senior, cross-functional team of executives from operations, product, and finance joined the “North American Championship Series,” often scheduled at odd hours, and which would run as long as it took to get everyone’s questions answered.

Sometimes these were simple bonuses, called “Do X Get Y” (DxGy) offers, where a $100 bonus would be added once the driver hit 50 trips in a week. This could be extended into a tiered incentive, with a $25, $50, $100, and $200 bonus upon hitting 10, 25, 50, and 100 trips. Another would be “guaranteed surge,” where after the 20th trip, let’s say, every trip afterward would be multiplied by 1.5.

One important source was large panels of anonymous credit card analytics resold and repackaged by the major card companies. Another source came from email analytics companies that had access to the emails—and thus receipts—of millions of consumers, and could offer market share metrics down to specific geographies and trip types.

any product that’s in a head-to-head race with competitors should track the outcomes—market share, active users, engagement, or otherwise—while they execute in the market, to put together cause and effect.

Rather than using Facebook only as a source of new users, Instagram was able to use its larger parent to build stronger, denser networks.

Crypto looks to be one of the most important new technologies emerging, and has networks at its core. Bitcoin has created an alternative to traditional currencies, but in my opinion, it’s even more exciting to see the trend of crypto becoming infused into every aspect of software.