Daniel's notes on Cold Start Problem

I was there to represent the Driver Growth Team--a critical team responsible for recruiting the scarcest asset in the entire business, Uber drivers. It was a big effort for Uber—we spent hundreds of millions just on driver referrals programs, and nearly a billion in paid marketing. Adding more drivers to the Uber network was one of the most important levers we had to grow the business.

In my several years there, it was unusual to ever hear about an aggregate number like total trips or total active riders--except as a big vanity milestone at a company all-hands. Those aggregate metrics were regarded as mostly meaningless. Instead, the discussion was always centered on the dynamics of each individual network, which could be nudged up or down independently of each other, with increased marketing budget, incentive spend for either drivers or riders, product improvements, or on-the-ground operational efforts.

Every day I was meeting with entrepreneurs to talk about their new ideas. In a given year, the firm might see thousands of startup ideas, many of which are new kinds of social networks, collaboration tools, marketplaces, and other new products. Conversations with startups begin with a "first pitch" meeting, where the entrepreneurs introduce themselves, show the product, and talk through their strategy. These are pivotal meetings, because when they go well, the startup could eventually receive an investment in the millions or even hundreds of millions of dollars. It's high stakes.

The term "network effect" has almost become a cliché. It's a punch line to difficult questions, like "What if your competition comes after you?" Network effects. "Why will this keep growing as quickly as it has?" Network effects. "Why fund this instead of company X?" Network effects. Every startup claims to have it, and it's become a standard explanation for why successful companies break out.

The Cold Start Problem is what every product faces at its inception, when there are no users. I'm borrowing a term here for something many of us have experienced during freezing temperatures—it's extra hard to get your car started! In the same way, there's a Cold Start Problem when a network is first launched. If there aren't enough users on a social network and no one to interact with, everyone will leave. If a workplace chat product doesn't have all your colleagues on it, it won't be adopted at the office. A marketplace without enough buyers and sellers will have products listed for months without being sold. This is the Cold Start Problem, and if it's not overcome quickly, a new product will die.

Network Effects for Uber: For Uber, the more users joined the app, the more likely it would be for riders to quickly find someone to take them from point A to B. It also meant that it would be easier for drivers to fill their time with trips, increasing their earnings.

For AT&T's annual report in 1900, Vail references the core concept of the network effect but without the contemporary name: A telephone without a connection at the other end of the line is not even a toy or a scientific instrument. It is one of the most useless things in the world. Its value depends on the connection with the other telephone and increases with the number of connections.

Telephone, Uber, eBay, OpenTable, Airbnb, dropbox, slack, Google suit, Instagram, Reddit, TikTok, YouTube, Twitter, WhatsApp, WeChat, Alipay, PayPal, Microsoft office…  These are all very diverse products, with different value propositions, target customers, and business models, and yet they all share a common DNA—they have network effects so that their products become useful as more people use them. Just as telegraphs and telephones eventually connected billions of people around the world, so too do these products—to buy and sell, to work together, to communicate, and more.

We love using networks when the right people are on them, whether that means marketplace sellers who list the right products and services, app developers who are building our favorite games, or our favorite celebrities, writers, and friends. In turn, they participate in the network because we and millions of other consumers are on them.

These networks are counterintuitive in that they connect people, but don't own the underlying assets. Airbnb doesn't own its rooms, and the hosts are free to list their inventory on other networks—the value is connecting the guests with their hosts. Apple doesn't own the developers that publish apps to its app store. And YouTube doesn't own its creators, nor its videos. Although the networks don't own their underlying resources, it's the connection that matters. The entire ecosystem stays on because the value is in bringing everyone together. That's the magic.

The "effect" part of the network effect describes how value increases as more people start using the product. Sometimes the increasing value manifests as higher engagement, or faster growth. People stay on the network and use it more, because other people are also using it more.

how do you tell if a product has a network effect, and, if yes, how strong is it? The questions to ask are simple: First, does the product have a network? Does it connect people with each other, whether for commerce, collaboration, communication, or something else at the core of the experience? And second, does the ability to attract new users, or to become stickier, or to monetize, become even stronger as its network grows larger? Does the user face a Cold Start Problem where retention is low when there's no other users? Note that the answers to these questions aren't binary—generally not yes or no—but rather in shades of gray.

Starting with a few hundred apps at its start, the App Store now has several million apps, all competing for consumer attention. As a result, app developers are locked in furious competition. It's not enough to be a good, useful app—they have to actively take away attention from other hyperaddictive apps that have been optimized over years to engage users. It's a zero-sum game between the millions of apps in the Apple App Store and Google Play store. No wonder the top app charts now rarely change, and are mostly dominated by large, established products.

These dynamics started in the consumer startup sector—within marketplaces, communication, social networks, where network effects have always clearly been important—but have infiltrated the software we use in the workplace as well. Knowledge workers increasingly have the same "it just works" expectations on enterprise software, as they do with the apps they use at home. Increasingly, this means the enterprise is becoming "consumerized" with software that is adopted by individuals, then spread within the company's network—with network effects.

All of the above reasons—constrained attention from users, intense competition, limited marketing channels to access new users, network-based competitors, and unclear future application platforms—create intense pressure on the industry. There's a lot on the line. When a new product leverages a network effect to build an ecosystem around it, adjacent industries can be disrupted quickly. As technology reinvents industry after industry, the overall opportunity continues to get bigger.