"The Cold Start Problem" by Andrew Chen

"The Cold Start Problem" is one of the books I wish I'd read earlier. Similarly to "Fundraising" by Ryan Breslow, it covers topics that seem obvious in hindsight but, for some reason, aren't discussed in simple terms anywhere else. Just like Ryan describes how to raise venture capital, Andrew dives deep into how to start, evolve and grow businesses requiring network effects (which in 2023 are most companies, in my opinion).

Before I describe the book's content, I'd like to point out that Andrew masterfully debunks the wrong definitions of various terms. For instance, "viral growth" is still understood as a part (or the goal) of guerilla marketing. You know, shoot an excellent video, and suddenly the company goes viral! In reality, though, the term defines actual growth in terms of how pathogens get distributed across populations. I.e. how many people do new users bring to the product? You can't argue that every new person bringing two more people to the platform is better than a viral video.

The author sprinkled the book with many real-life examples of the companies that used the approaches described. It is challenging to recommend simply listening to Andrew's Google talk or reading a summary because the complete picture here might be necessary.

Overall, the wisdom comes down to the five stages of company development, each having its issues and remedies:

1. The Cold Start Problem
2. Tipping Point
3. Escape Velocity
4. Hitting the Ceiling
5. The Moat

The cold start problem

You want to find the "atomic network," the smallest network that can benefit from using the app. In messengers, it can be two friends chatting. In marketplaces, you must provide enough supply to get the proper demand. You have to onboard this atomic network at the same time right away. Then you copy and paste the approach to onboard more units of this atomic network onto the platform.

Network effects don't have only positive sides. For instance, you'll go too if many of your friends leave an app. This quality is called the "anti-network" effect. You have to maintain high retention and low churn so that you don't get a runaway train heading south. The anti-network effect is why you must onboard many right people simultaneously.

The cold start problem has two sides: the hard side and the easy side. One must focus on the hard side to stabilize the network. For instance, onboarding content creators (the hard side) on YouTube and Twitch is necessary for the users (the easy side) to come in.

Tipping point

No, the tipping point isn't about whether to give 18% or 25% to that cute bartender that served you a couple of tonic waters. Tipflation, am I right?

In the second section, Andrew explains how to win over whole markets. A company must build many networks in the same market and get them to the tipping point when the growth explodes. The good thing is that the more networks you make, the faster the following network will reach the tipping point.

For example, consider Tinder first expanding to networks across colleges, then states, then countries.

Escape velocity

The third stage is about maintaining the growth speed and network effects. A company must fight hard to keep growing. Andrew outlines three forces here:

1. Acquisition — you need to keep onboarding high-value users (not the ones that don't contribute to the network effects)
2. Engagement — the more people on the network, the more engagement you get from the users
3. Economics — the larger the network, the better financial incentives and profits the company gets

Hitting the ceiling

Any popular product will hit the ceiling — this is inevitable. The author describes some examples of how companies have solved the issues. However, at this stage, most solutions are unique to the situation. Even more — the situations keep changing for the same company.

The growth at this stage looks like it is exploding, hitting the ceiling, exploding again, hitting the ceiling again, and the cycle repeats. Every new struggle is a new opportunity. Remember when Facebook talked about "onboarding the next billion users?"

The moat

Ok, here's where things got spicy. The author describes the rivalry between Airbnb and their European competitor that they outlasted. I encourage you to read this section yourself. I'm not sure if this will benefit you at your stage in life (let's be honest, most of us don't have the moat problems), but if you do, don't miss out on the whole book.

A company must work on maintaining the hard side of the network and make every effort to keep them on the platform. The rival that does it wins.

Again, "The Cold Start Problem" is one of the books I'd want to come across earlier in life. However, even now, it will benefit me at the current stage of my life. I highly encourage you to pick up a copy and read through it over the weekend. It is short yet full of exciting insight!