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Zusammenfassung von The Cold Start Problem

Name: The Cold Start Problem
Rating: 4 (178 reviews)
Author: Andrew Chen

Andrew Chen

How to Start and Scale Network Effects

4 (178 Bewertungen)

20 Min.

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The Cold Start Problem by Andrew Chen is a business book that offers guidance on how to launch products without an established user base. It provides insights, case studies, and actionable tips for entrepreneurs and startups.

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What’s in it for me? Learn how a company can win out through the power of network effects.

Those crazy cats in Silicon Valley love their buzzwords and slogans. But right now there’s one phrase eclipsing all the others: network effect. It’s used so often, by hopeful entrepreneurs and established CEOs alike, that it’s become something of a joke.

When start-ups pitch to investors, they kinda use “network effect” as an answer to every question. They’re asked How will you deal with competitors? Their answer? Network effect. They might get the question: How will you scale in foreign markets? They’ll answer: Network. Effect.

But what on earth is network effect and why is everyone talking about it?

To explain network effect, let’s take a look at Uber. Uber grew, district to district, city to city, all across the US, until it became the massive global company it is today. And it grew through the network effect.

It worked like this: as more users joined the Uber app, the more likely it was that they’d find others to share a ride with. Naturally, this also meant that drivers found it easier to locate someone who needed a ride. As more and more people interacted with the technology, the more exponentially the network grew. And the more lucrative Uber became. This is network effect.

But to understand things even better, let’s go back in time and look at an earlier technology: the telephone.

At the beginning of the twentieth century, there were fewer than 5 million telephones in the US. These 5 million phones had to serve nearly 90 million Americans. But one phone company, the American Telephone and Telegraph Company – today’s AT&T – was growing fast.

At the heart of that growth was company president, Theodore Vail. He understood network effect better than anyone at the time. In 1900, he observed that a telephone without a connection is one of the most useless things in the world. If no one else has a phone, how on earth can you call them? You need other people to have a telephone for it to be of any worth.

Vail put it this way: its value depends on the connection with the other telephones and increases with the number of connections.

And that is the network effect in a nutshell. Whether we’re talking about apps, from Instagram to Snapchat, or rideshare companies like Uber and Lyft, the product is only as valuable as the network using it.

Take the network away and the product simply ceases to exist.

Launching new tech is very difficult in the twenty-first century.

Okay, now that we know what network effect is, we might be tempted to think, well, that it would be easy to take advantage of. Everywhere you look, from the metro to the sidewalk, you’ll see people squinting into their devices, hooked on apps and games.

You’d think, then, that right now would be the optimal moment for launching new technology. The environment seems perfect to turn a plucky little start-up into the next Tinder or Zoom. Network effect means that new products can easily attract users through word-of-mouth and organic growth. Even a tiny start-up can leave established companies in the dust. Right?

Wrong. Utilizing network effect is far from easy.

In fact, it’s very difficult – we live in the age of squeezed attention spans, where only the most useful, or engaging, apps and technologies will succeed.

Let’s go back a moment to 2008. That was the year when the iPhone apps platform hit phones and devices everywhere. Back then, when there was barely anything on the platform, all a new app had to do to succeed was be more interesting than a commute or waiting for a bus. That was easy.

A decade later and it’s a different story. Today, the App Store has several million apps, all competing for attention. To succeed, any new app has to steal attention from all the other extremely addictive apps – many of which have been optimized over time to engage users. For years, the top charts of the Google Play Store and Apple App Store have looked the same.

Success is even difficult for massive established giants looking to move into a new market where a smaller company dominates. Even if a larger company offers the same product as a smaller competitor, it won’t be able to break through if the smaller company has captured the market and is growing through the network effect.

Take the battle between Snapchat and Instagram. When Instagram tried to copy Snapchat’s features, like its Stories and photo messages, it just couldn’t outdo its rival. The reason? Snapchat had a resilient and growing network that Instagram just couldn’t capture.

Meerkats can tell us a lot about the network effect.

By now, we should have a handle on network effect and how it works. But let’s go a little deeper and approach the concept from a more unusual angle.

When a network begins to expand rapidly, it reaches a point known as “escape velocity.”

All right, let’s recap: once a meerkat population reaches a certain size, it passes a threshold and begins to expand dramatically.

The “cold start problem” is the first obstacle that businesses need to overcome.

I hope by now you have a good idea of what network effect is and how it happens. You’re also probably a bit fed up with me saying it again and again.

Sustaining a large network can be extremely difficult.

Let’s imagine that your tech product – let’s say, a new app that lets people find pet-sitters in their local area – has bridged the cold start problem and taken off. Network effects have kicked in, and you’re now sitting at the head of a massive global company that allows pet owners to go on vacation, safe in the knowledge that their kitten or labradoodle will be in safe hands.

For an established company, building a moat is the best defence against upstart competitors.

Can you remember a time before Airbnb? Today, it’s the world’s biggest rental service. Everything about its success boils down to networks – from the way it scaled so quickly to the way it retains its number-one spot at the top of its market.

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Worum geht es in The Cold Start Problem?

The Cold Start Problem (2021) explains what network effects are, how they work in practice, while illustrating them with real-world examples, from companies like Zoom, Airbnb and Uber. From getting tech companies off the ground in the 21st century, to the population dynamics of meerkats, The Cold Start Problem is an in-depth look at the way networks develop and interact with each other.

Wer The Cold Start Problem lesen sollte

Startup leaders looking for rapid growth
Established CEOs looking to reawaken sluggish companies
Anyone interested in network dynamics

Über den Autor

Andrew Chen is a general partner at venture capital firm Andreessen Horowitz. Before that, he led the growth teams at Uber during their early years. He’s also a board member of fast-growing startups like Substack, Clubhouse, Z League, All Day Kitchens, Sleeper, Maven, and Reforge. He runs a popular blog, and his work has been featured in Wired, the Wall Street Journal, and the New York Times.

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