The Cold Start Problem

Key Insights

A book about network effects attempts to answer the question: How to use network effects to scale a product?

What is a network effect? It's what happens when a product gets more valuable as more people use it. A telephone inherently has no value until there's someone on the other line to call.

It was mainly used in B2C but has increasingly become more relevant in B2B apps as well. Slack or Notion is more useful as more people use it.

Meerkat's Law: Meerkats, being hypersocial animals, benefit from living together. The value of being a Meerkat goes up as more of them join the crew. But, overpopulation can cause a collapse.

There's a tipping point where resources become exhausted.

The Cold Start Problem – getting the right people and content on the platform at the same time. For instance, Slack is only useful when at least 3 people are using it on a team.

Tipping Point – as a new network comes online, it becomes easier to build and scale the subsequent one. There's a dominos effect, aka momentum.

Escape Velocity – a phase when a product starts to scale and tap into the benefits of the networks for further growth and scale.

The Moat – companies can use "Network-Based Competition" to develop a moat around their business. Large networks tend to have stronger moats. Smaller networks usually end up picking niches and building atomic networks that can be highly defensible.

So what exactly is 'The Cold Problem'?

It's a problem of starting up the network – where you start with a single network and fight against the negative forces that could drive the network to zero.

To solve this problem, you need the right people on the network. For example, 10 people using Slack from the same team is better than 10 random people. Density and interconnectedness are important.

Startups can start and grow in a small market, which makes them dangerous competitors. These markets tend to be insignificant for larger companies.

Original text: The Cold Start Problem by Andrew Chen