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Want to read an overview of The Cold Start Problem by Andrew Chen? What is the network effect and how can it help your business?
In The Cold Start Problem, Andrew Chen explains how to build a startup that uses the network effect to compete with the established giants in your industry. In the book, Chen offers tips on building a network-based business from scratch.
Read on for an overview of Andrew Chen’s book The Cold Start Problem: How to Start and Scale Network Effects.
The Cold Start Problem Overview
If there’s a secret to success in the tech industry, it’s a thorough understanding of the network effect: The more users you gain, the more valuable your product becomes and the easier it is to profit and grow. But if bigger equals better, is it even possible for a company starting from scratch to compete with established tech giants? In The Cold Start Problem, Andrew Chen—a venture capitalist and former Uber executive—explains how to do exactly that: build a billion-dollar tech company from the ground up.
In particular, this approach will help you avoid the most common pitfall for tech startups, what Chen calls the Cold Start Problem: When your network is small, it’s extremely difficult to grow. We’ll discuss this in more detail later.
To research The Cold Start Problem, Andrew Chen conducted over 100 interviews with some of his most experienced professional contacts, including the founders of successful startups such as Instagram, Tinder, and Airbnb. In the book, he condenses their wisdom into a detailed roadmap describing what tech startups need to do to evolve into industry titans.
Background: What Is a Network-Based Business?
Before explaining the first step in founding a tech startup, we need to establish some basic background information about network-based businesses. According to Andrew Chen’s The Cold Start Problem, a network-based business is any product or service that involves interactions between users and gains value as more people use it. For instance, the more users a social media app has, the more likely it is that you’ll have friends who use it, and the more connection and enjoyment you’ll get out of using that app. Therefore, the more valuable the app is to you.
Step #1: Create Your First Subnetwork
In The Cold Start Problem, Andrew Chen argues that the first step of creating a business at the massive scale we just described is to create a single network that’s as small as possible and still functional. Different types of businesses will require different sizes of networks to meet this threshold: Products that only involve isolated one-to-one interactions can function fine with just two users, while products focused around group interaction and networking may need a few dozen people interacting before the experience becomes satisfying enough to function well.
Tip #1: Attract a Group of Users All at Once
First, Chen asserts that you need to get a group of users to join a subnetwork all at once to achieve network stability quickly. Otherwise, that subnetwork is doomed to fizzle out and fail. As we’ve seen in earlier examples, the minimum number of users you need to have a functional subnetwork differs depending on your product. Chen refers to this minimum number of users as your subnetwork’s “Tipping Point.”
(Shortform note: Chen uses the phrase “Tipping Point” to describe two similar, yet distinct ideas. The first, as we’ve established, is the point at which a subnetwork has enough users to function well. The second, which we’ll cover later, is the point at which you have enough subnetworks accelerating the growth of your whole network to dominate the market. For clarity, we’ll use the term “subnetwork stability” to describe the former idea and “Growth Explosion” to describe the latter.)
Tip #2: Keep the Product Simple
How do you design a product that makes users want to keep using it and form subnetworks? In The Cold Start Problem, Andrew Chen advises you to make your product extremely simple—simple to understand, simple to use, and simple to explain to others. In particular, your product should perform one simple function perfectly rather than aim to do many things well.
Why focus on a single function? Chen states that keeping your product simple makes it easier to attract and retain users, expanding your network and vastly increasing its value. Maintaining simplicity makes it clear exactly what your product does, and users who easily understand what a product is are more likely to use it. Further, making the product simple to use increases the likelihood that they’ll learn how to use it and continue to use it. Finally, making the product simple to explain increases the chances that users will share it with each other.
Step #2: Repeatedly Replicate That Subnetwork
Once you’ve built a functioning product and established your first subnetwork, Chen explains that the next step is to do the same again—start another subnetwork and repeat. With each new subnetwork you establish, your next subnetwork will be easier and faster to build, creating exponential growth toward your goal of establishing the biggest network in the market.
Chen asserts that once you hit a certain number of subnetworks, you’ll begin growing fast enough to become a legitimate competitor to the current industry leader—this is the Growth Explosion (as mentioned earlier, Chen refers to this stage as the “Tipping Point”).
Chen notes that while you’re trying to reach the Growth Explosion, the strategies you employ to build subnetworks don’t have to be scalable or cost-effective. After growth takes off, you can cease unprofitable strategies and recoup this early heavy investment by leveraging your large, profitable network. Although these unprofitable strategies can be risky, they can empower you to dominate an entire market extremely quickly.
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Here's what you'll find in our full The Cold Start Problem summary:
- How to build a billion-dollar tech company from the ground up
- Why you need to understand the network effect if you're in the tech industry
- How to overcome the negative effects of rapid growth
