Book SummaryThe Cold Start Problem, by Andrew Chen

1-Page Summary1-Page Book Summary of The Cold Start Problem

If there’s a secret to success in the tech industry, it’s a thorough understanding of the network effect: The more users you gain, the more valuable your product becomes and the easier it is to profit and grow. But if bigger equals better, is it even possible for a company starting from scratch to compete with established tech giants? In The Cold Start Problem, venture capitalist and former Uber executive Andrew Chen explains how to do exactly that: build a billion-dollar tech company from the ground up.

In particular, this approach will help you avoid the most common pitfall for tech startups, what Chen calls the Cold Start Problem: When your network is small, it’s extremely difficult to grow. We’ll discuss this in more detail later.

To research The Cold Start Problem, Chen conducted over 100 interviews with some of his most experienced professional contacts, including the founders of successful startups...

The Cold Start Problem Summary Background: What Is a Network-Based Business?

Before explaining the first step in founding a tech startup, we need to establish some basic background information about network-based businesses.

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...

The Cold Start Problem Summary Step #1: Create Your First Subnetwork

Chen argues that the first step of creating a business at the massive scale we just described is to create a single network that’s as small as possible and still functional. Different types of businesses will require different sizes of networks to meet this threshold: Products that only involve isolated one-to-one interactions can function fine with just two users, while products focused around group interaction and networking may need a few dozen people interacting before the experience becomes satisfying enough to function well.

Over time, you’ll create countless independent yet interconnected networks, which we’ll call “subnetworks” (Chen refers to them as “atomic networks”). Collectively, these subnetworks will make up your massive, profitable network. Starting with a single successful subnetwork and expanding is far easier than trying to launch an enormous, market-dominating network all at once.

Counterpoint: Prioritize Speed Over Stability

It's possible that Chen recommends steadily scaling to prioritize stability in the early days of your business. In Blitzscaling, Chris Yeh and Reid Hoffman disagree with...

The Cold Start Problem Summary Step #2: Repeatedly Replicate That Subnetwork

Once you’ve built a functioning product and established your first subnetwork, Chen explains that the next step is to do the same again—start another subnetwork and repeat. With each new subnetwork you establish, your next subnetwork will be easier and faster to build, creating exponential growth toward your goal of establishing the biggest network in the market. (We’ll discuss exactly how each subnetwork enhances growth a little later.)

Chen asserts that once you hit a certain number of subnetworks, you’ll begin growing fast enough to become a legitimate competitor to the current industry leader—this is the Growth Explosion (as mentioned earlier, Chen refers to this stage as the “Tipping Point”).

Chen notes that while you’re trying to reach the Growth Explosion, the strategies you employ to build subnetworks don’t have to be scalable or cost-effective. After growth takes off, you can cease unprofitable strategies and recoup this early heavy investment by leveraging your large, profitable network. Although these unprofitable strategies can be risky, they can empower you to dominate an entire market extremely quickly.

Networks That Never Become Profitable

Chen...

The Cold Start Problem Summary Step #3: Streamline and Accelerate Growth

Once you’ve successfully launched a number of subnetworks, you’ll hit the Growth Explosion. This is when across all your subnetworks, you have enough users for the network effect to kick in with gusto, accelerating growth to the point where you can challenge the market leader in your industry. Chen states that at this stage, you can shift your focus away from manually starting new subnetworks and instead work to refine your product in ways that amplify the network effect. This allows you to grow your user base faster than you could ever imagine.

(Shortform note: Although Chen assumes that the readers of his book want to grow their company into an industry-dominating giant, you may want to keep your business intentionally small and simply stop at this step. In Anything You Want, Derek Sivers describes how he turned down weekly offers from firms who wanted to invest in his startup and help him expand. His rationale for doing so was that [rapid expansion can sometimes distract you from giving the best possible product to your existing...

The Cold Start Problem Summary Step #4: Push Through Negative Effects of Growth

If you’ve optimized your product to take advantage of all aspects of the network effect, your user base will skyrocket, and you’ll find yourself in a highly profitable—if not totally dominant—market position. However, Chen warns that at a certain point, extreme growth instigates a unique set of new problems. If you don’t take steps to solve these problems, they’ll degrade the quality of your product and halt your rapid growth.

(Shortform note: Because there will always be problems for you to solve, even after you’ve achieved “success” by growing your company into a market leader, trying to solve all the major problems your company faces will likely cause you to feel burned out. For this reason, in Clockwork, Mike Michalowicz recommends designing your business so your team can successfully run it without your direct input. This way, you can take vacations as necessary to preserve your physical and mental health and renew your motivation to build a great business.)

Let’s take a look at three problems uniquely inherent to large networks and explain...

The Cold Start Problem Summary Step #5: Ward Off Challengers

Once you’ve pushed through all the negative effects of growth, you’ll be a dominant market leader, earning massive profits. Chen explains that at this point, the network effect works in your favor: Potential competitors lack the benefits of your network that we discussed in Step #3, so it’s much more difficult for them to field a comparable product.

(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.)

Chen...

Shortform Exercise: Brainstorm a Startup Strategy

Chen asserts that you can start a company from scratch and leverage the network effect to scale it into a threatening competitor to any established business. To prepare to do this, plan out the first few steps of your startup strategy.

The first step in building a network-based startup is to set up a stable, functioning subnetwork. To do this, you need a simple product that serves the needs of a specific niche group. What simple product could you make, and what group could you design it for? (For example, you may decide to create an app that lets runners host, discover, and register for races near them. You decide to recruit the participants of a nearby 5K race to be your first subnetwork.)