The Cold Start Problem

Every startup pitch claims network effects. Andrew Chen sets out to make the term usable. His starting point is the cold start problem: a marketplace with no sellers, or a messaging app with no friends, is worthless to its first users, and most networked products die there. He also argues that Metcalfe's law, which values a network by its number of users, says little about getting started.

Chen led the rider growth teams at Uber during its pre-IPO years and is a general partner at Andreessen Horowitz, investing in consumer startups. He had blogged about growth for years. The book draws on that work and on interviews with founders and executives at LinkedIn, Twitch, Zoom, Dropbox, Tinder, Uber, Airbnb and Pinterest.

Its value is the framework. Chen separates the network's hard side from the easy side, splits network effects into acquisition, engagement and economic effects, and explains how growth stalls once a network saturates its market. Business Insider called it a practical handbook for a tricky concept. It is written for builders rather than investors, and many of its stories will be familiar to anyone who follows tech.

Founders and product teams are the main audience. Investors who underwrite marketplaces, social apps or software that spreads through teams will get a checklist for testing a company's claims about its network.

1. Start small and dense. A network succeeds first in one city, campus or team where enough users interact to keep each other engaged. Total user counts in a pitch tell you little.
2. Find the hard side. In most marketplaces one side is scarce and expensive, like drivers for Uber. Unit economics depend on how a company recruits and keeps that side.
3. Network effects come in three kinds. Cheaper acquisition, higher engagement and better monetization are separate effects. Ask which ones a company actually shows in its numbers.
4. Every channel decays. Click-through rates on any marketing channel fall over time, so growth that depends on one channel is fragile.
5. Moats can be attacked. Large networks leave niches underserved, and copycats can win customers back with the same tactics that brought them in. Treat a network moat as something to test, not to assume.

After an introduction to network effects and why Metcalfe's law misleads, the book follows a network through five stages.

1. The cold start. Chen defines the atomic network, the smallest group that can sustain itself, and argues that density matters more than size. He covers the hard side of a network, such as Uber's drivers, and tactics like invite-only launches and tools people will use before the network exists.
2. The tipping point. Once one atomic network works, the task is to copy it, city by city or team by team, until growth spreads across a market.
3. Escape velocity. Chen describes the acquisition, engagement and economic network effects that strengthen with scale, and how teams measure and amplify them.
4. The ceiling. Growth slows as markets saturate, marketing channels decay under what Chen calls the Law of Shitty Clickthroughs, and negative forces build, including user revolts like the Reddit blackout.
5. The moat. Networks compete with networks. Chen explains why winners take most and how even large incumbents can be attacked through niches their networks underserve.

A startup executive and investor draws on expertise developed at the premier venture capital firm Andreessen Horowitz and as an executive at Uber to address how tech’s most successful products have solved the dreaded cold start problem”—by leveraging network effects to launch and scale toward billions of users. Although software has become easier to build, launching and scaling new products and services remains difficult. Startups face daunting challenges entering the technology ecosystem, including stiff competition, copycats, and ineffective marketing channels. Teams launching new products must consider the advantages of the network effect,” where a product or service’s value increases as more users engage with it. Apple, Google, Microsoft, and other tech giants utilize network effects, and most tech products incorporate them, whether they’re messaging apps, workplace collaboration tools, or marketplaces. Network effects provide a path for fledgling products to break through, attracting new users through viral growth and word of mouth. Yet most entrepreneurs lack the vocabulary and context to describe them—much less understand the fundamental principles that drive the effect. What exactly are network effects? How do teams create and build them into their products? How do products compete in a market where every player has them? Andrew Chen draws on his experience and on interviews with the CEOs and founding teams of LinkedIn, Twitch, Zoom, Dropbox, Tinder, Uber, Airbnb, and Pinterest to offer unique insights in answering these questions. Chen also provides practical frameworks and principles that can be applied across products and industries. The Cold Start Problem reveals what makes winning networks thrive, why some startups fail to successfully scale, and, most crucially, why products that create and compete using the network effect are vitally important today.