This article is an excerpt from the Shortform book guide to "The Cold Start Problem" by Andrew Chen. Shortform has the world's best summaries and analyses of books you should be reading.
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What is a market leader company? How do you achieve and maintain market dominance?
According to Andrew Chen’s The Cold Start Problem, a market leader company is one that has pushed through all the negative effects of growth, is earning massive profits, and is using the network effect to ward off competitors. Chen’s book provides examples of market leaders and how they achieve success.
Read on to learn all about market leader companies, according to Chen.
What Is a Market Leader Company?
In The Cold Start Problem, venture capitalist and former Uber executive Andrew Chen explains how to build a billion-dollar tech company from the ground up. He claims that once you’ve pushed through all the negative effects of growth, you’ll become a market leader company, earning massive profits. Chen explains that at this point, the network effect works in your favor: Potential competitors lack the benefits of your network-based business, so it’s much more difficult for them to field a comparable product.
According to Chen, 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.
All of the most ubiquitous and profitable tech products are network-based and can be considered market leader companies: Social media platforms, online marketplaces, and multiplayer video games all take advantage of the network effect, and they often have enormous networks of millions of users.
| Why Speed Matters for Becoming a Market Leader Company Chen recommends steadily scaling to prioritize stability in the early days of your business. In Blitzscaling, Chris Yeh and Reid Hoffman disagree with prioritizing stability in a startup, arguing that sometimes, doing so makes growth too slow. Instead, it’s worth sacrificing stability for the opportunity to grow as quickly as possible and become the first big player in a new market. Why is this sometimes the ideal strategy? Early market leader companies possess advantages that make it nearly impossible for other firms to compete. For example, the most talented employees and investors want to align themselves with the organization that’s concretely winning—this talent advantage helps whatever company is on top to continue dominating. |
(Shortform note: Although your hard work has brought you a massive advantage over competitors in the form of network effect benefits, such an advantage can turn into a disadvantage if it negatively impacts your mindset. In Ego Is the Enemy, Ryan Holiday argues that success often curses people with the egocentric feelings of entitlement, paranoia, and an obsession with control. Any of these three mindsets can trigger irrational decisions and sabotage your success, so make a conscious effort to monitor your feelings and keep your ego in check.)
How to Maintain Your Lead
According to Chen, once you’ve become a market leader company, all that’s left to do is maintain your position by closely monitoring your competitors and making sure they can’t convert substantial portions of your users. Adjust your user acquisition strategies and your product to convince users to choose you over competitors, then verify that your adjustments are effective. This requires a lot of data analysis—by studying user data you’ve collected as well as data purchased from external sources, you can get ideas for how to convert competitors’ users, and you can track the impact your strategies have on user behavior.
| Avoid Making “Beating Competitors” Your Primary Goal Chen frames this stage of the startup process as a cutthroat competition against your closest competitors to maintain your hold as a market leader company. However, in The Infinite Game, Simon Sinek argues that you should see your competitors as friendly rivals and avoid making it your goal to thwart their success. Companies that obsess over beating their competitors have less motivated and less inspired employees than companies that focus on achieving a noble mission. Sinek would likely approve of Chen’s suggestion to gather data on your competitors with the intention of improving your product. However, as opposed to Chen’s suggestion to use this data to steal competitors’ users, Sinek would argue that you benefit most by using this data primarily to learn from your competitors and use their ideas to offer a better service to users. According to Sinek, learning from your competitors is much more difficult when your only mission is to “beat” them. Setting competition as your primary goal motivates you to focus on ways that your company is better than them, meaning you ignore their strengths and don’t learn from them. |
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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
