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Chicken and egg problems Solving the cold-start problem for platforms SANGEET PAUL CHOUDARY Best-selling author of

Chicken and egg problems

Solving the cold-start problem for platforms

SANGEET PAUL CHOUDARY

Best-selling author of the books Platform Scale and Platform Revolution

ABOUT THE AUTHOR

SANGEET PAUL CHOUDARY

is the founder of Platformation Labs and the best-selling author of the books Platform Scale and Platform Revolution. He has been ranked as a leading global thinker for two consecutive years by Thinkers50, ranking among the top 30 emerging thinkers globally in 2016 (Thinkers50 Radar) and ranking among the top 50 thinkers of Indian origin in 2015 (Thinkers50 India).

He is the co-chair of the MIT Platform Strategy Summit at the MIT Media Labs and an Entrepreneur-in-residence at INSEAD Business School. He is also an empaneled expert on the global advisory council for the World Economic Forum’s initiative on the Digital Transformation of Industries. His work has been featured as the Spotlight article on Harvard Business Review (April 2016 edition) and the themed Business Report of the MIT Technology Review (September 2015).

As the founder of Platformation Labs, Sangeet is an advisor to leading executives globally. He is also an empaneled executive educator with Harvard Business School Publishing, and has advised the leadership of Fortune 500 firms, family-owned conglomerates, and key government bodies.

He is frequently quoted and published in leading journals and media including the Harvard Business Review, MIT Technology Review, MIT Sloan Management Review.The Economist, The Wall Street Journal, WIRED Magazine, Forbes, Fortune, and others. Sangeet is a frequently sought after advisor to CXOs globally on the topic of digital transformation and also serves as a fellow at the Centre for Global Enterprise in New York.

He is a frequent keynote speaker and has been invited to speak at leading global forums including the World Economic Forum’s Annual Meeting of the New Champions (Summer Davos), the WEF ASEAN Summit, and the G20 Summit 2014 events. Sangeet has a bachelors in computer science from IIT Kanpur and a masters in management from IIM Bangalore.

CONTRIBUTING AUTHORS

Marshall Van Alstyne and Geoffrey Parker are contributing authors to the research published by Platformation Labs, including the books Platform Revolution (co- authors) and Platform Scale.

ABOUT PLATFORMATION LABS

Platformation Labs is C-level executive advisory firm and think-tank, focused on the analysis and implementation of platform business models and network effects towards the digital transformation of industries. Platformation Labs has advised governments, Fortune 100 firms and high growth startups in 40+ countries across the Americas, Europe, Africa and Asia-Pacific. Our thought leadership and intellectual capital are commissioned and licensed by leading consulting firms globally and have been featured in leading global forums.

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PLATFORM SEEDING

STRATEGIES

An overview of solving the chicken and egg problem

Sangeet Paul Choudary

Acquiring new users for an unknown business is difficult. Startups face this challenge all the time.

This problem gets compounded further when the business is a platform. A platform or network business is a great business to be in once it has been seeded and has achieved critical mass. However, seeding a platform from zero is very complicated and this is the stage at which most user-driven businesses fail.

There are three problems that platforms commonly encounter.

The mutual baiting problem (No producer equals no consumer equals)

Two-sided businesses typically have a producer side and a consumer side which are typically distinct roles. For a two-sided business to work, both producers and consumers need to be on the platform. However, producers won’t come to the platform without consumers and vice versa. Consumers act as a bait to get the producers to come in and vice versa. This is the mutual baiting problem that such networks suffer from which needs to be overcome to seed the platform with users on both sides and

spark interactions. This is often referred to as a chicken and egg problem, which isn’t really accurate as the problem is less about seeding one side first and more about bringing on the two together so that

they attract each other.

Strategies

Since consumers are a bait to the producers and vice versa, this problem is typically solved by providing an alternate bait to one of the sides. Seeding can be accomplished by:

Once one side is seeded, it acts as a bait for the other side to come on board.

The ghost town problem (No complementary products)

Platforms, often, don’t have any standalone value. E.g. Wikipedia without the contributors has no meaning, AirBnB without rental listings is useless. A section of users on the platform (in producer roles) create the content and products for consumption. Hence, platforms are initially ghost towns. Users visiting the platform find no activity, and hence no value, in the platform. Producers, in turn, don’t contribute unless they see some consumer interest. As a result of this vicious cycle, a ghost town continues to remain a ghost town. The challenge is to get complementary products/content on the platform from Day One to break the vicious circle.

Strategies

Provide access to new production infrastructure that the user would use even if the network was a ghost town:

Get a marquee player

The double company problem

Building a new business requires acquiring and serving a user base. With two-sided networks, this problem gets complicated further as two distinct sets of users need to be acquired and served. Doing this during the initial stages of seeding the platform is twice as difficult as building any other business.

Strategies

Successful platforms solve the double company problem by not trying to go down the double company path. They try to focus only on one set of users at a time. The strategy may be:

Producer-first

Consumer-First

Both Sides Together

The Critical Mass Problem

Platforms and networks are not one-sided services provided by a startup. The service is provided by the producers on the platform and the platform creates value by helping both sides get together and interact. On eBay, a person looking for Angry Birds inflatable balloons needs to be matched to a person selling them for a transaction to be initiated. On Quora, a question needs to be shown to the closest matches in terms of users who can answer it for the right answers to be sourced.

For a network business to succeed, the right producers need to be matched with the right consumers. The likelihood of having both the right producers and the right consumers for all possible transactions increases as the size of the user base increases. This makes it particularly difficult for a new startup to take off because there might not be enough members of both sides (or in both roles) to spark interactions. Critical mass is the minimum size of the user base at which enough number of producers and consumers exist to .

Strategies

Groupon solved this problem making a transaction the focus of the marketplace sparking transactions from Day 1

PAYPAL, REDDIT AND THE POWER OF FAKIN’ IT The single most viewed and most controversial article

PAYPAL, REDDIT AND THE

POWER OF FAKIN’ IT

The single most viewed and most controversial article on this blog.

Sangeet Paul Choudary

There were several factors that contributed to YouTube becoming the #1 video sharing service on the web. But a lot of initial adoption was driven by the fact that it had pirated content hosted on it. If you

wanted to watch the latest episode of Lost for free, YouTube was your best bet: no queued downloading

through torrents, just stream it from the server. Kim Dotcom noted how pirated content was driving YouTube’s adoption and figured that seeding some of that could unlock traffic for MegaUpload. It definitely worked. But playing with pirated content, somebody was bound to get burnt. Megaupload went under when it was alleged that the pirated content was, unlike the YouTube case, a deliberate part of the platform’s strategy.

Kim Dotcom’s mail to his crew, which ultimately damned Megaupload, offers a rather brute-force but effective tactic for seeding platforms. Platforms and two-sided markets are difficult to kick off, in general.

The problem gets a lot more complicated when both consumers and producers need to be on the platform simultaneously. For a service like Yelp, the consumer side can gather traction independent of

merchants coming in. But for marketplaces like eBay and communities like Quora, the consuming side

(buyers, question askers & readers) and producing side (sellers, question answerers) need to be on the platform from Day 1 for interactions to spark. (These may not be distinct groups of people.) This is because there is no inherent value in the standalone product for a user (eBay, Quora) without the participation of users from the other side who create complementary products (goods for sale, answers). When users come to the platform, they need to get an indication of activity.

Some community owners, as in the case of Megaupload, solve this by creating a false au

ra of activity using a variety of methods (Who would have tried Megaupload were it a veritable video ghost town?). First-time users get the impression that the platform is already in business and stay on.

Over time, the user base grows, and the platform sustains activity without having to fake it.

There are typically three ways of going about this:

Seeding and Weeding

Dating services simulate initial traction by creating fake profiles and conversations. Users who come to the site see some activity and are incentivized to stay on. Marketplace sites may also show fake activity to attract buyers and sellers.

Seeding Demand

In the book, PayPal Wars, Eric M. Jackson talks about how PayPal grew a base of sellers who accepted PayPal by creating demand for the service among buyers. When PayPal figured that eBay was their key distribution platform, they came up with an ingenious plan to simulate demand. They created a bot that bought goods on eBay and then, insisted on paying for it using PayPal. Not only did sellers come to know about the service, but they also rushed onto it as it already seemed to be getting popular. The fact that it was way better than every other payment mechanism on eBay only helped repeated usage.

Seeding Supply

A platform is useless without complementary products. Marketplaces, especially, are dead without sellers posting on them. To solve the chicken-egg problem, some marketplaces create fake supply to attract buyers. Services marketplaces put up fake projects to show activity. Steve Sammartino talks of how he seeded Rentoid.com by essentially buying the initial items himself and renting them out (though he refers to it as “Inventing Demand”, when actually he was seeding supply).

There is, of course, a method to the apparent madness.

Use attractive seeds

When you’re faking it, you might as well offer the best. Megaupload knew that Collective Soul’s music videos would drive more traffic than some home video of a puppy snoring in a bathtub. Dating services know what men want (who doesn’t) and seed the network with photos of Latin American models with eclectic interests (not that the latter matters).

Encourage behavior you want to see on the site

Reddit co-founder Steve Huffman recently admitted that the link-sharing site was initially seeded with fake profiles posting links to simulate activity. The key was that the links being posted were the kind of content the

founders wanted to see on the site over time. Reddit not only gathered steam, but also the initial content attracted people who were interested in similar content and created a culture of good content in the community.

Consider incentives

If you’re inventing supply or demand and don’t want to do it all in-house, incentivize an initial set of users to spark greater activity than they otherwise would. Amazon Mechanical Turn may not be a bad place to start at if what you’re looking for are users who can churn out some activity for cheap.

Embrace non-scalable

Scalability rocks! I mean it’s the whole point this industry is what it is. But during the early pre-viral, pre- engagement phase of a community, non-scalable methods may help kick start things. Quora admins answered a lot of questions themselves at first. Brian Chesky talks about how they got the first users on Airbnb themselves literally going door-to-door.

Sometimes, it helps to learn manually what works and then, automate it, instead of automating and testing a hundred times.

More importantly, seeding initial activity helps you to experience the product as a user. Invaluable education that!

CONQUER YOUR MICRO-UNIVERSE: CHOOSING YOUR HARVARD Learning from the early days of Facebook. Sangeet Paul Choudary

CONQUER YOUR MICRO-UNIVERSE:

CHOOSING YOUR HARVARD

Learning from the early days of Facebook.

Sangeet Paul Choudary

“The reason [Facebook] went in through college was because college kids were generally not Myspace users, college kids were generally not Friendster usersNobody actually believedthat you could enter the market through this niche market and gradually through this kind of carefully calculated war against all the other networks become the one network, to rule them all.

  • - Sean Parker, on Facebook’s seeding strategy

The odds were stacked against Facebook when it launched. Friendster was already a big social network, and Myspace was growing fast. Of all platform businesses, social networks are probably the most unforgiving on late market entrants. Why would someone, who was already on Myspace or Friendster, get onto Facebook.

In hindsight, Mark Zuckerberg’s micro-universe targeting was a masterstroke that effectively built the biggest online company since Google.

Solve a pain point for an underserved segment

The closed nature of Facebook focusing on ‘underserved’ college students was a masterstroke. Social networks existed and were already finding large scale adoption. But they were flooded with fake

profiles, men who posed as women and creepy lurkers. Students, on the other hand, wanted a network

with real people, which could possibly improve their dating chances. Facebook solved both these needs, first by focusing on identity (it required signup with a Harvard email address) and then by focusing on the profile picture (a reasonably important input to the dating decision). It solved a clear need which helped it find rapid adoption.

Target a micro-universe where small is good

Harvard students like exclusivity. And Facebook was this cool social network that made them feel more exclusive. In a similar manner, high-end commerce marketplaces build traction relatively fast by catering to an audience that values exclusivity.

Quora users like like-mindedness (which is also often a criticism leveled at the platform). There was no trolling on Quora in its earlier days and as it expanded it created tools (down vote etc.) to effectively curb trolling, which prompted the who’s who of Silicon Valley to come on board and help build an incredible resource.

Choosing a micro-universe where the exclusivity and similarity of users is an added draw can help engage users better.

Choose a true community with existing patterns of interaction

Facebook leveraged a community with strong offline ties. This helped build critical mass rapidly. Online

interactions were built on top of offline interactions.

Look for a micro-universe with natural evangelists

Students at Harvard loved networking and self-promotion. Facebook helped them do both. A lot of early evangelism for Facebook was driven by existing users who wanted to get the word out as the platform opened up. Yelp started in San Francisco and targeted lifestyle categories. It was a unique city-category combination which led to early adoption among tech-forward young users who incidentally also travelled a lot, all of which helped spread the word out to other locations as Yelp expanded.

Find a micro-universe which is representative of the universe you ultimately want to build out

The key question when starting small is “Does this scale?”. Will what works here work elsewhere? While user focus is critical, over-catering to the needs of the micro-universe can come in the way of effectively moving on to other adjacent niches.

Secondly, the micro-universe itself should be representative of the larger whole and should not offer advantages that won’t stay relevant to a larger audience. e.g. if your micro-universe is finding rapid growth because of certain geographic (abnormally high population density) or demographic (abnormally skewed gender ratio) anomalies, it might be difficult expanding further using what worked with the smaller audience.

Consider logistical feasibility

Quora and LinkedIn started in Silicon Valley and gained initial traction among the founders’ and employees’ existing network. Both startups snowballed from that small start to get global traction.

A micro-universe may be a use case

What’s as big as Facebook but utterly unknown? Most people outside China have never heard of Tencent. Yet, at nearly 800M users, Tencent QQ is probably the second most popular community product on the interwebs. While there are many factors that led to Tencent’s domination of the Chinese market, their focus on gaming and dating on an otherwise general purpose communication network was a key reason for early growth. Tencent exploited the popularity of gaming and dating among Chinese youth and, in fact, created all the tools required for these use cases. This focus helped the company differentiate its services from competitors who were too busy trying to be everything for everyone.

Finally, stay laser focused on analytics

More often than not, businesses that target micro-universes do not start with a clear micro-universe in mind. In fact, it is quite difficult to effectively determine which micro-universe your product will work best with. Many startups just put out the platform but stay laser focused on analytics. When there is abnormally high uptake from a particular user group, the startup pivots towards exclusively solving the needs of that micro-universe.

What do you think? How did you go about choosing the micro-universe to target for your startup? What does your Harvard look like?

Next up: How to grow beyond your micro-universe

MICRO-UNIVERSE: HOW FACEBOOK, LINKEDIN, YELP AND ETSY EXPLOITED PRE-EXISTING NETWORK STRUCTURES Why offline network structures are

MICRO-UNIVERSE: HOW FACEBOOK, LINKEDIN, YELP AND ETSY EXPLOITED PRE-EXISTING NETWORK STRUCTURES

Why offline network structures are important to online network effects.

Sangeet Paul Choudary

This is a follow-up post on the series on conquering a micro-universe, the first two parts of which can be read here and here. In my subsequent interactions with some of the readers, I realized that there seems to be some confusion about the term, and I just wanted to clarify it here. A micro-universe is not the same as a target group, an early adopter base, a niche or a test market. It’s not just about starting small. There are several other factors about a micro-universe that increase the chances of success while building a network. The reason I call it a micro-universe is because it has the characteristics that you would want in the final user base that you are aiming for.

A SHORT NOTE ON NETWORK STRUCTURES

Let’s look at how networks are structured. We typically see the following structures:

  • 1. User User: All social networks have the user-user structure at a minimum. Users have direct

relationships with each other.

  • 2. User Object User: Social products which are built around seeds have this structure. Yelp

(Reviewer Restaurant Review Reader) and TripAdvisor (Reviewer Hotel/Travel Spot Review Reader) are examples of this structure. Users do not necessarily have direct relationships in this structure.

  • 3. User Product User: Wikipedia is an example of a network where users have almost no

interaction with each other except that some produce the product (Wiki articles), and others consume it.App stores are another example. Users do not have direct relationships in this structure.

The difference between the second and third case is that in the second case, the seed is put in by the

platform while it is created by the producers in the third case. Most platforms are a combination of 2 or

more of the above. Quora and Pinterest are a combination of 1 and 3 while Foursquare follows a combination of 1 and 2.

MICRO-UNIVERSE AND NETWORK STRUCTURE

The most desirable characteristic of a micro-universe is that it should already have some elements of one or more of the above network structures. This drastically increases the rate at which an online network can be built on top of it. A micro-universe already has an existing ‘offline social network’, and you are merely bringing it online. Here are a few examples:

1. Harvard University students already had existing social connections offline. They shared similar tastes, were in a geographically contained area and often interacted within a closed group. The User-User network that

Facebook was trying to build already existed offline within this micro-universe.

  • 2. People in the tech community in San Francisco already discussed their favorite restaurants before Yelp

started. Offline conversations were already clustering around popular restaurants. Yelp was working on top of

this existing offline dynamic.

  • 3. People in Silicon Valley already had an existing address book and Rolodex. LinkedIn offered to bring it online

with the added value of a self-updating Rolodex.

  • 4. Craftmakers were already interacting on particular online forums. Etsy targeted them and rode on their existing

interactions on these forums.

FACTORS DETERMINING CHOICE OF MICRO-UNIVERSE

The key for all the micro-universes above was that:

  • 1. There already was a high density of offline interactions within the micro-universe. e.g. If Yelp had

started by targeting reviews for dentists instead of restaurants, it would not have had the luxury of leveraging the same density of offline interactions. In a similar way, if Facebook had started by targeting a city, say, Boston, instead of a college, say, Harvard, there would have been far weaker offline interactions to build on top of. A high density of offline interactions is important for initial word of mouth. This is one of the advantages, I believe, LinkedIn (in the context of networking) had in starting in the valley and not in some other part of the world.

  • 2. The users within the micro-universe were fairly homogeneous for the purposes of the network: If

Facebook had targeted all of Boston, instead of a closed group like Harvard, a high level of initial activity would

have been unlikely.

A micro-universe is very different from the general term ‘early adopter’ which is often characterized more by ease of targeting and tech savviness than by network structure. When you’re seeding a platform, you need not just eyeballs and users but active interactions. Otherwise you just have a set of nodes, not an actual network. The principle of the micro-universe also extends to explain why it is so much easier to start a network by piggybacking an online network. You have high-density interactions plus the users are already online. Other factors determining choice of micro-universe

1. If the platform involves offline interactions, the micro-universe should minimize the offline

physical distance/friction between users: e.g. If you’re starting a network for trading used books offline, the chances of the community taking off increases when you target a community which has minimum offline barriers to allow easy trading. e.g. targeting a particular college would reduce barriers

to participation as compared to targeting a particular city.

2. The micro-universe should maximize off-platform word of mouth opportunities: In addition to the product delivering delight, word of mouth depends on the amount of investment required to spread the word. Hence, I feel choosing a closed community as a micro-universe, where users already interact a lot, really helps. In the offline world, this could be a university campus, a corporate or a club (especially relevant for seeding networks targeted at premium users). In the online context, this would refer to existing forums with a large degree of activity and pre-existing relationships. Creating an app on Facebook is not the solution here as users aren’t already interacting in the context of your service. Pre- existing interactions in your context help spur the word of mouth.

These are some of the reasons why I’m a big fan of seeding communities within closed groups, getting interactions to work and then growing it beyond. This does not refer to a general early adopter demographic or the target market we talk of in traditional marketing. It specifically refers to a self- contained, fairly homogeneous, online or offline group with pre-existing interactions and minimum distance/friction. I would just like to clarify that the above point about a micro-universe applies only to platforms and communities, not to one-sided businesses like a SaaS business or an eyeball-based media business. Naturally, this won’t work perfectly for every platform but the ones that are able to successfully identify and penetrate a micro-universe increase their chances of success.

FROM TWITTER TO TINDER: WHY YOU SHOULD STOP LAUNCHING AT TECH CONFERENCES Contrary to popular wisdom,

FROM TWITTER TO TINDER: WHY YOU SHOULD STOP LAUNCHING AT TECH

CONFERENCES

Contrary to popular wisdom, launching at a tech conference may be a bad idea unless

you can leverage organic interactions at the event.

FROM TWITTER TO TINDER: WHY YOU SHOULD STOP LAUNCHING AT TECH CONFERENCES Contrary to popular wisdom,

Sangeet Paul Choudary

If you’re running a tech startup, you’ve probably tried to (or would love to, if you could) do at least one of the following:

  • - Get TechCrunch to cover you

  • - Launch at SXSW

Unfortunately, as launch channels go, the more unimaginative the channel, the less successful it is at getting you traction. This is because everyone else is trying to do the same thing as well and the audience has had too much of the same thing.

But more importantly, these launch strategies are bumps, they’re not engines. As Paul Graham points out in his startup growth curve, the TechCrunch of Initiation (or the SXSW of initiation, if you will) may help bring in a lot of users, but those users rarely stay on. Users are distracted and if you cannot instantly demonstrate the value of your offering, they’ll hop-click-jump to the next shiny thing.

There are exceptions, of course. Tech events are a great place to launch if your pitch can succinctly demonstrate the value that your offering provides (especially if you have a SAAS offering), if your key user base will actually be other startups or if your goal with launching is looking for investors rather than looking for users.

But especially if you’re building something that relies on network effects, launching at a tech event isn’t going to be helpful at all.

So how do you make it work?

Does that mean platforms: social startups, marketplaces, etc. should never launch at events? How does one make it work?

Twitter’s breakout moment was the 2007 SXSW conference. While Twitter had been live for more than nine months, prior to the conference, it wasn’t getting much adoption. Twitter’s feed, rank-ordered by recency, would work best for a small number of users when most of them were using it synchronously. The founders needed to build a concentration in time, similar to how Facebook built concentration in space by targeting Harvard. They chose SXSW since an event affords massive concentrations in both time and space. The founders got cracking and created a Twitter visualizer. They set up flat panel screens in the conference hallways. A user at the conference could text ‘join SXSW’ to 40404, which would then show up on the screens and have the user automatically follow other active Twitter users at SXSW. With enough users tweeting and following each other, and the screens providing massive feedback to the tweeters in real time, Twitter gained the critical mass and activity required to get the platform going.

This case study lays out a key element of gaining adoption for platforms. You can’t just create awareness when your value proposition relies on network effects. You need to demonstrate the value of using the platform. Value on the platform is experienced by participating in the core interaction of the platform. Hence:

The best way to launch a platform business at a conference is to ensure that the core interaction on the platform is organically embedded in the conference experience.

Twitter did this with its launch. Attendees got more from the conference by participating on the core interaction on Twitter. Just like PayPal and other platforms piggybacked on underlying networks, platforms can piggyback on events by ensuring that their core interaction is embedded into the interactions at the event.

The following year, Foursquare recreated the magic. While Twitter was huge at SXSW one year down, it didn’t help attendees discover the best bar around the area. Foursquare was laser-focused on getting check-ins right and was the only platform to leverage real-time location at that point in time. Again, the core interaction on Foursquare was successfully embedded at the conference.

At SXSW 2013, BangWithFriends tried the same strategy, but the conference clearly didn’t approve of the core interaction they were trying to promote.

From boring conferences to frat parties

Tinder, a location-based dating application that gained massive adoption a little more than a year back, launched at a frat party at the University of Southern California. We don’t know how well BangWithFriends worked at SXSW but Tinder sure wielded its magic at frat parties. By taking the awkwardness out of the whole act of hooking up, Tinder’s core interaction actually removed the friction in the core interaction of these frat parties. Users could swipe each other, get matched and, being in the same area at the same time, hook up.

Location-based, real-time applications have a unique challenge while getting traction. You need a lot of people to be present at the same place at the same time. You can’t gain traction by traditional marketing; the network effect simply wouldn’t develop. The best way to develop the network effect, then, is to launch at an event and ensure the core interaction of the platform fits in at the event.

And back to boring conferences

Finally, Airbnb figured its own way to make conferences work. While an alternative to the traditional hotel industry today, Airbnb gained initial traction by launching in cities around conferences and aggregating a lot of transactions in a limited space and time. Conference attendees needed a place to stay; hosts needed to see the platform bring them some business. By launching during a highly liquid event, Airbnb ensures there was enough value created for both sides to keep them engaged and have them use Airbnb beyond the conference.

Conclusion

We repeatedly see this model work out. Concentrating in space and time helps create highly liquid situations. Facebook’s launch in Harvard created a concentration in space while Twitter’s launch at SXSW created a concentration in time. Further, such concentrations lead to adoption only when the core interaction on the platform complements, enhances or removes friction from the core interaction at the real world event.

Happy Launching!

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THE SECRET TO SCALING SOCIAL NETWORKS AND

LOCAL MARKETPLACES

Why some social networks scale and others don’t.

Sangeet Paul Choudary

We often associate social networks with hyper-growth, a perception largely fostered by growth

infographics of Facebook, Twitter and Pinterest that get shared all around. But not all social networks

scale that easily.

There are three patterns that I often see across the growth of most social networks (and most platform business models, for that matter). I’ve talked at length about this in earlier posts, but here’s a quick recap:

First, most social networks start with a chicken and egg problem at launch. Since users create value, there is no value when there are no users on board, which in turn makes the social network unattractive

for the first few users to sign up. You cannot just growth-hack your way out of chicken and egg problems. They are solved through careful incentive design and seeding of initial value. So chicken and

egg problems are immensely difficult to overcome.

Secondly, social networks scale when users bring in other users. Without organic virality, it is very difficult for social networks to scale.

Finally, most networked startups start out by targeting a specific market. They do not start out by targeting the whole world. Facebook started with Harvard, Groupon started with Chicago and Quora started with the tech community in the Valley.

The Unscalable Social Network

While Facebook, Twitter and Pinterest have great growth curves to show off, many social networks fail to

scale at that rate. There are certain characteristics that structurally prevent such networks from scaling at that rate, irrespective of the quality of execution. Typically, such networks have one or more of the following characteristics:

1) They need to solve the chicken and egg problem multiple times, not just once

2) There is a cap to organic virality i.e. users cannot bring in more than a certain number of other users

3) There is very low overlap between markets and hence, a low probability of easily expanding from one to the other

These three characteristics create conditions that are unfavorable to scalability.

These three characteristics usually occur when a network tends to get concentrated into clusters of user nodes.

Some networks actually allow cluster formation by design. Let’s look at a few examples.

Path The anti-viral network

Path is a network that mirrors very strong offline family ties. Every family constitutes a network cluster, and Path is made of many such network clusters. Let’s define a network cluster as a subset of the network where users tend to cluster together because of a shared characteristic. In the case of path, it’s family ties and every user is part of a particular network cluster. In contrast, users on Facebook are part of multiple such network clusters. Path, being about family, has every user as part of only those network cluster(s) that represent her family.

If one were to visualize these networks, Path would likely have multiple network clusters which are

unconnected to each other, since these would be different family groups with no common relationship. Facebook, in contrast, would have links between different network clusters (say your college network and your work relationships network).

Facebook benefited from high virality because a user gets greater value out of the network by getting all her friends on board. In contrast, Path structurally requires users to invite only family members. The use case itself imposes a natural cap on virality.

These three characteristics create conditions that are unfavorable to scalability. These three characteristics usually occur when

Nextdoor Solving thousands of chicken and egg problems

Nextdoor is another example of a social network that has multiple network clusters within. Nextdoor is a social network for the neighborhood, and each neighborhood is a network cluster. Since users are unlikely to be part of multiple neighborhoods, these network clusters aren’t connected with each other. Every neighborhood is insular and siloed.

Nextdoor faces a unique problem. Since every neighborhood is an independent network cluster, every such network needs to be seeded from scratch. Members in neighborhood A do not have a natural incentive to invite members in an unconnected neighborhood B, even though they may be friends otherwise.

Yes, some word of mouth does help to get new network clusters started, but Nextdoor has a unique problem. Network clusters in Path (i.e. the family) are so close-knit that there isn’t much of a chicken and egg problem there once you get two users from a particular family in. Nextdoor needs a larger number of active users for users in a neighborhood to find value. Hence, it faces some form of a chicken and egg problem every time it spreads to a new neighborhood. The problem is likely to become easier as it achieves created penetration in a particular city but it still does exist.

City Networks When spillovers don’t happen

City-specific networks and marketplaces like Uber, Yelp and OpenTable also have fairly insular network clusters. Every city is a network cluster of producers and consumers. There is some cross-usage, e.g. traveler from city A to city B may reserve a restaurant in city B. But the primary and dominant use case is within one particular network cluster.

Social networks scale when the activity in one network cluster can spill over to another network cluster.

LinkedIn, for example, started out in the US but spilled over across markets as users started inviting

connections in different markets. LinkedIn already had millions of users in Asia before it ever opened an

office there.

This spillover is discouraged when your product fosters insular non-interacting network clusters like families, neighborhoods or cities.

While Path and Nextdoor have some potential for spillover (through word of mouth among users in the same city), city-specific platforms like Yelp, Uber or Foursquare need to start operations ground up in every new city.

eBay realized that it was a network of country-level network clusters. Buyers in one country were not too likely to buy from sellers in another country. eBay’s expansion strategy, in its early days, was simply to acquire copycats in different countries. Facebook, in contrast, never followed this strategy partly because it would have been a product and data nightmare, but also because geographical barriers do not pose a problem to the type of user- user interactions that Facebook enables. eBay had very little spillover while Facebook had loads of it.

Growth and Spillover

The networks with the fastest growth are the ones that freely allow spillover. Airbnb, unlike Uber and OpenTable,

has tremendous potential for spillover. The fact that the use case is travel makes such spillover organic to the network. The host and traveler will most likely be part of different city networks. Such cross-cluster interaction allows growth to occur without having to be confined within geographical boundaries.

In contrast, Uber and OpenTable need to start operations ground-up in every city every time they want to scale

geographically.

Tipping Points

This brings us to another interesting point. The growth curves of Facebook, Twitter, Airbnb and Pinterest have well-defined inflection points. Social networks with clusters may not have such well-defined tipping points because of the additional investment in starting up new clusters. They are more likely to show some step function characteristics.

Strategies for achieving spillover

So what do you do if you’re running such a business? When a platform business has isolated network clusters, there are two ways of kickstarting activity in new network clusters.

1.

CROSS-CLUSTER INTERACTIONS

Can you create an interaction where a user in network cluster A needs to interact with a user in network cluster B? How often do these interactions occur? How often is such an interaction likely to bring in new

users and create new networks?

Interestingly, Facebook started out by building standalone campus networks but later allowed cross- campus interaction, and subsequently opened out completely. In case of Facebook, cross-university relationships already existed offline. In case of Path or Nextdoor, some other trigger may be needed on which two families or two neighborhoods may exchange information. Whenever your platform encourages the creation of multiple network clusters, as in the examples above, creating an interaction across them creates much-needed spillover.

  • 2. CROSS-CLUSTER INCENTIVES

Groupon is another example of a buyer-seller network where every city is an isolated network cluster.

Hence, starting new cities, again, has the same chicken and egg problem. Groupon combated this by creating national deals: a cross-network incentive that attracted consumers in cities where Groupon

hadn’t yet launched. By amassing consumers through national deals, Groupon had an initial base of

consumers to start with while kick-starting a new city and just needed to get the merchants and deals.

Tweetable Takeaways

  • 1. The hockey stick isn’t universal. Not all social networks grow exponentially.

  • 2. Social networks like Path or Nextdoor inherently restrict virality because of network clusters.

  • 3. Groupon’s National deals helped kickstart new markets.

PIGGYBACKING MECHANICS: WHATSAPP, INSTAGRAM AND NETWORK EFFECT MARKETING How to grow like Instagram, WhatsApp, PayPal and

PIGGYBACKING MECHANICS: WHATSAPP, INSTAGRAM AND NETWORK EFFECT MARKETING

How to grow like Instagram, WhatsApp, PayPal and YouTube. The common pattern behind all large growth stories.

Sangeet Paul Choudary

Welcome to the age of the zero-dollar marketing startup. WhatsApp and earlier Instagram have officially become a permanent part of startup lore for having built multi-billion dollar businesses without (reportedly) spending a dime on marketing.

Meanwhile, Airbnb has grown from a hipster community of mattress-renters to the world’s largest provider of accommodations without spending even a fraction of what traditional hotel chains spend in marketing.

Marketing is dead! Or that’s what many would have you believe. A great product sells itself, of course!

Fire the marketing team!

Well… not quite!

The fastest growing networks on the internet Airbnb, Instagram, Facebook, YouTube, Snapchat may not have spent much on marketing, but they all have one thing in common: Each of these networks piggybacked on top of another pre-existing network.

Facebook and Bebo grew on top of the network embedded in our email. Many networks, including

Instagram, grew on top of Facebook itself. For a while, Airbnb grew on top of Craigslist, while Snapchat

and WhatsApp have leveraged the mobile phone’s organic network, the phone book, to create networks

native to mobile,

If you’re building a social network, marketplace or platform and you haven’t considered piggybacking on

a network, you need to think again.

Much so-called ‘growth hacking’ relies on testing of cause-and-effect and optimization of funnel conversions. But in the early days of a network or a marketplace, startups are faced with a radically

different problem. Why will users come on board when there’s no one else there? Why will producers set

up shop in a marketplace that is not yet frequented by consumers and vice versa?

The classic chicken and egg problem cannot be solved by pulling in users and optimizing conversions. Before network effects set in, users will neither get activated nor will they get engaged.

Set a network to catch a network

To grow a network, you need to think like a network. To get enough users on board to create network effects, you need to piggyback upon another network. Piggybacking on a thriving network works wonderfully as long as your platform is co1mplementary to that network and delivers additional value to the users there. As far as growth strategies go, there are few strategies that are more scalable and sustainable as engines of growth.

PayPal got almost all its traction by piggybacking on eBay and offering a much superior payment method than the painful check-over-mail. It solved the pain points around payment on eBay providing instant payments without the hassle of credit cards and assuming much of the risk of online fraud.

Soon enough, PayPal was the predominant mode of payments on eBay and rode its growth to become synonymous with online payments.

But not all piggybacking stories end happily ever after. Apps that have leveraged Facebook to grow aggressively, have found their business jeopardized with a change in Facebook’s news feed algorithm. Startups that tried to emulate Airbnb and siphon users away from Craigslist were sent cease and desist letters. Even PayPal was banned on eBay for a while before the marketplace had to accede to the wishes of the users.

So what does it take to successfully piggyback a network?

The biology of piggybacking

Borrowing analogies from biological systems, there are three types of relationships between your startup (the Guest) and the underlying network (the Host).

The Happy Clownfish

In certain cases, a partnership model may be initiated by the Host i.e. the underlying network.

Much like how colorful clownfish (Guest) inhabit sea anemones (Hosts) whereby each party gains protection from their respective predators, both networks benefit from each other.

For example, Facebook’s partnership with Spotify, following its launch of frictionless sharing, is designed

in a way that both Facebook and Spotify benefit.

Facebook needed greater engagement among users and Spotify needed listeners, even though the implementation of frictionless sharing has much that can be improved. Earlier, Zynga, Slide, and RockYou benefited from a similar relationship with Facebook, piggybacking on Facebook for growth by providing value to Facebook users, while improving user engagement and retention on Facebook.

The Hitchhiking Remora

Not all networks may initiate partnerships the way Facebook did. In fact, most don’t.

In such cases, it is the prerogative of the guest (your startup) to be backward compatible with the host, much like a remora attaching itself onto a shark and feeding off it, you need to figure out a way to embed your functionality in the host network.

YouTube gained early traction by piggybacking on Myspace. Engagement on Myspace was built around musicians who needed a way to showcase their talent. At the time, online video was broken. YouTube fixed that with its flash-based one-click video experience and Myspace users finally had an answer to their problems.

Flickr solved the pain of sharing pictures in the blogosphere. Every blogger putting up a picture on his blog helped showcase the service to others. Flickr rapidly grew to become the fifth most visited website on the internet by the time Yahoo lapped it up.

As these examples demonstrate, these relationships start without an explicit partnership. The Guest makes a conscious decision to make its functionality and content embeddable in the Host network. If

such embedding solves a key user pain point, the users start embedding Guest functionality into the Host network, driving adoption. The chicken and egg problem is solved as more users on the Host get

exposed to this functionality and migrate to start using the Guest’s functionality.

The Bloodsucking Parasite

Finally, some networks may actively discourage any form of guest-host relationship. In these cases, the startup needs to reverse-engineer an integration with the host. Such piggybacking is generally non- consensual.

Skype, Viber, and WhatsApp have similar relationships with carriers where they piggyback the connections created by the carriers (via the user’s phone book) to provide an alternate communication channel.

Viber rode this success to a $900M acquisition recently, and WhatsApp was acquired by Facebook for $19 billion in cash and stock.

Sidenote: It is interesting to note Skype, Viber, and WhatsApp are able to arbitrage users because of a lack of effective carrier data discrimination. That is to say, carriers are well-aware of WhatsApp allowing users an end-around onerous SMS fees, but feel powerless at this point in time to raise network data rates to make it unprofitable for WhatsApp, forcing users back to SMS.

How to succeed with piggybacking

While piggybacking may seem attractive, startups need to be aware of the relationship they have with the host network and pursue strategies accordingly.

More importantly, not all piggybacking is successful. The stories above suffer from survivorship bias and are useful only when understood in the context of the factors that dictated their success and spelled failure for other startups that tried similar strategies.

In general, everyone wins in The Happy Clownfish scenario.

But in most Hitchhiking Remora relationships, the Host controls the relationship with the piggybacking Guest. This is specifically the case whenever the Host launches an open-access API upon which startups build off that to access the Host’s netwo1rk. While remora may add value by plucking parasites, fickle sharks have been known to bait-and-switch and devour orbiting remoras.

The Bloodsucking Parasite relationship is a lot easier to anticipate and is always antagonistic. In most cases, it triggers an instant immune system response, which, translating to business, amounts to legal action.

The only long-term sustainable network-piggybacking, then, is the Happy Clownfish. Both the clownfish and the sea anemone need each other. Their respective physiologies are a clue. A clownfish will never

grow poisonous tentacles to sting potential predators, and a sea anemone will never grow fins to swim.

To be a clownfish in a sea anemone, your network needs to provide high-contrast, high-value-add differentiation with significant barriers to entry. Otherwise, you risk coming across like one of thousands of commoditized remoras. Facebook doesn’t want to build its own music library, and Spotify isn’t interested in connecting the world outside of music.

There are three factors that determine success with piggybacking:

  • 1. If the host explicitly calls for piggybackers, be the first to the party

When Facebook opened its platform to external developers, Zynga jumped on board and gained rapid

adoption. Many startups that followed failed to get such adoption because users had become more sophisticated to the viral invites by that time and Facebook, as well, started dampening the spread of these invites subsequently.

Being the first to the party helps to get users deeply engaged before they get sophisticated and start ignoring messages from other services that follow.

Be the first clownfish to get to your sea anemone.

  • 2. If you can build for backward compatibility, ensure you add value to the underlying platform

YouTube solved a problem for Myspace bands. Flickr solved a problem for bloggers. PayPal solved multiple pain points for buyers and sellers on eBay. Be the useful remora that eats the little parasites on the shark.

3. Be the first to reverse-engineer before the host wises up

When stealing traction parasitically, it pays to be the first to discover the chink in the armor of host network. Airbnb gained traction before Craigslist wisened up. But every startup that has tried that strategy subsequently has failed to replicate the same success and has instead been caught in a legal quagmire.

Being first to piggyback a host network is the most important determiner of success. There is typically a time window while these strategies work. And almost always, first-to-the-party wins. When the host wants you to piggyback, there’s a window while it will be effective. When the host doesn’t want it, there’s a window before which the host wises up. In either case, being first helps.

The story of many of today’s large social networks and marketplaces follows similar trajectories. Bringing in users through linear funnel hacking tactics often prove counter-productive. Finding a new network and

piggybacking it helps gain traction among enough users simultaneously and build network effects.

So the next time you hear about a startup boasting a zero dollar marketing budget and putting it all on building a great product, think again! Piggybacking is the new marketing for the age of the network effect.

CHICKEN AND EGG PROBLEM: HOW TO SEED YOUR PLATFORM IN STANDALONE MODE Where will Square’s reader

CHICKEN AND EGG PROBLEM: HOW TO SEED

YOUR PLATFORM IN STANDALONE MODE

Where will Square’s reader take the company and why OpenTable’s staggered platform approach was so successful.

Sangeet Paul Choudary

In a network business, there is typically no value in the network without users, and users do not show up on an empty network. This becomes especially important in two-sided networks. e.g. Airbnb really serves no value to a consumer if there are no producers (accommodation hosts) on it. There is a Mutual Baiting Problem.

When starting such a business, the key question that entrepreneurs face is: “How do I get initial users to start using my network when there is no activity on it?”

One of1 the ways of solving this problem is to ensure that the product has a ‘standalone mode’. Essentially, a user should be able to derive value out of the product even when other users aren’t on it.

A product that has standalone value irrespective of the network is more likely to get traction among at least one set of users. In most cases, the end consumer is sold purely on the value of the standalone product and not on the promise of the added benefit when the network kicks in. The network can then be turned on once enough users are acquired through this hook.

Square is a classic example of this strategy. Payments is a space which is especially difficult to get into, partly because it is very difficult to have a critical mass of buyers and sellers start using your payment mechanism simultaneously. In the case of Square, the standalone credit card swiping value proposition was enough for merchants to start adopting the product. The consumer side of the equation, which is still kicking in, has the potential to disrupt retail payments altogether, but that was not the dream that was sold to the merchants originally.

Service booking systems like OpenTable (restaurant reservation) work in a similar manner. To seed usage among one side of the network (restaurants), the company distributes booking management systems which the restaurant can use as standalone software. Once OpenTable had enough restaurants on board, and

hence access to their seating inventory as well, they opened out the consumer side to allow them to start

making bookings and collecting a lead generation fee from the restaurants. Cab booking companies that

have been mushrooming across India work in a similar manner.

In general, this strategy works better for two-sided networks where one side (typically merchants) needs to be brought on board before the other side can see value in the network.

In the case of a one-sided consumer network, Delicious gained initial traction in a similar way. Early adopters used Delicious to store browser bookmarks in the cloud, and it delivered standalone value. Once the user base hit critical mass, the social bookmarking features started getting used and the value of the network grew with more users.

However, seeding one-sided consumer networks has gradually become easier with the emergence of social sharing. Instagram, for example, while a great product in standalone mode itself, didn’t have to grapple long with figuring out how to create a network as users could instantly share their creations over Facebook, Twitter, etc.

This obviously isn’t a one-size-fits-all strategy. In fact, most network businesses may not find it all that easy to create a product with standalone value. e.g. A dating or matrimonial site is unlikely to have an offering that provides standalone value. However, whenever a standalone model can work, it is one of the most efficient ways of seeding a network. Two-sided networks, in particular, have their task cut out trying to build two companies: one on the producer side and one on the consumer. This strategy essentially allows them to build one company at a time.

Is there some part of your platform that you can launch on standalone mode?

CHICKEN AND EGG PROBLEM:

HOW TO USE YOUR PRODUCERS

CHICKEN AND EGG PROBLEM: HOW TO USE YOUR PRODUCERS TO SEED THE PLATFORM How do Skillshare

TO SEED THE PLATFORM

How do Skillshare and Kickstarter get to network effects?

Sangeet Paul Choudary

Getting both producers and consumers on the platform is incredibly difficult especially on platforms where both sides are quite often clearly distinct groups. Designing your platform so that your producers can bring along consumers is a great strategy for seeding a platform while concentrating on only one side of the market.

This works well under two scenarios.

A. There is a clear incentive for producers to bring consumers on the platform. This typically happens when the platform helps the producers manage or interact with consumers more efficiently.

B. The ‘off-platform’ reputation of

the

producers

attracts

the

consumers

to

the

platform. Exploiting off-platform dynamics always helps while seeding and growing a platform.

 

PROVIDE AN CONSUMERS

IMPROVED

MECHANISM

FOR

PRODUCERS TO

INTERACT WITH EXISTING

This model works really well for all those loyalty startups out there. Perx, Shopkick, Tagtile are all classic cases of this scenario where the merchants are signed up and the platform essentially helps merchants cater to their existing set of consumers to make them more sticky. The retailers encourage their customers to use the platform. Hence, creation of one side of the network leads to creation of the other side. Over time, the merchants benefit from some data-driven cross-pollination here as other consumers on the network (brought on by other merchants) who are interested in their products and services are directed across to them.

When I first shared this thought on Quora, one of the readers responded with how this strategy had worked very well for his startup, Willstream Labs.

Willstream Labs is a cross-border remittance play with a twist: It allows its users (global migrants) to send funds to their home country but also gives them control over how these funds get spent back home at certain specific organizations. The migrant is typically interested in ensuring the funds get deployed at the right organization and are not handled by some intermediary beneficiary. As a result, Willstream Labs allows users to refer/invite the specific organizations (similar to importing one’s friends on a social network). This has helped them build out a two-sided network by focusing exclusively on only one side and helping them transact with the other side.

PROVIDE A PRODUCTION INFRASTRUCTURE. WHEN PRODUCERS PRODUCE, THEY BRING IN THE CONSUMERS

Google doesn’t spend much by way of getting consumers to buy an Android phone. The handset manufacturers do that. The handset manufacturers, in this case, are the producers using the Android OS to create new phones. Platforms that provide production tools (and not just distribution or transaction tools) especially to producers who have few other options benefit immensely from this strategy.

Youtube, WordPress and most content hosting platforms, for that matter, grow in a similar way by providing users with creative tools (video hosting and content blogging respectively). Once users produce, they become marketing agents for the platform to get other consumers in.

FOCUS ON HIGH QUALITY PRODUCERS

High-quality producers attract consumers. Tutorspree does this quite effectively. The online education platform focuses on getting high-quality tutors on board. As of mid-2012, there were 6000 tutors on the service with approximately one in every three applicants being expected as tutors. These tutors evangelize the platform to their students who in turn spread the word about it.

GET A FLY-ATTRACTING BEACON

We know that one. Malls have been doing this for the last 50 years. Get a big name retailer, give them good floor space and use that to attract consumers to the mall, who incidentally will get exposed to the smaller merchants too. Turns out, this strategy works equally well for digital platforms, especially content platforms, that need to take off and find adoption among producers. Ad networks use this strategy quite often by getting exclusive access to premium eyeballs and using that to lure in the advertisers.

Ultimately, it boils down to understanding the motivations of the producer side on the platform. What about the platform will make them draw other users onto the platform. Loyalty platforms help retailers manage their customers. YouTube helps budding musicians promote themselves. What does your platform do?

WHY PAYMENTS STARTUPS FAIL:

A LESSON IN USER BEHAVIOR

WHY PAYMENTS STARTUPS FAIL: A LESSON IN USER BEHAVIOR Why most payment startups fail to get

Why most payment startups fail to get traction.

Sangeet Paul Choudary

Users hate having to learn entirely new behavior. Products that find rapid adoption typically try to fit into existing user contexts. Introducing entirely new behavior may lead to barriers in adoption and this problem is compounded in a two-sided network where having to learn new behaviors on both sides can make the mutual baiting problem of seeding the network even more complicated.

Mobile Payments is a particular case of two-sided network activity where users prefer trying the most accepted behavior and new behavior takes time to find adoption. That’s largely the reason why NFC- enabled Payments still hasn’t gone away. Consumers won’t go out of their way to get NFC-enabled phones unless there are enough merchants accepting them and merchants don’t want to invest in terminal hardware unless enough consumers start using the network. Both sides need to change behavior, the consumers need to adopt a new payment instrument and the merchants need to enable newly store infrastructure, both of which are new enforced behaviors.

Seed a new model by changing user behavior on one side

That’s exactly why Square has done so well, targeting one side exclusively. Square started by not changing anything at the consumer end. The consumer uses his credit card as he always did. The

merchant had to change his behavior but given the superior and simpler pricing and the convenience of

receiving payments anytime anywhere, the merchant side was seeded well. Now, that the merchant side is seeded, new behavior is being introduced on the consumer side with the consumer card case.

Reintermediate an existing model without changing user behavior on one side

M-PESA established itself as a revolutionary payment mechanism in Kenya for a similar reason. The North and East African nations already had a system of money transfer inherently linked to the religion of Islam, known as Hawala. In the Hawala system, a user asks a Hawala agent to transfer money to an acquaintance at another location, who then contacts another Hawala agent in the new location to pay the user’s acquaintance. The user then pays the sum to the first agent along with a small fee. The debt between the agents is logged and settled at a later date. M-PESA rode on this behavior, without trying to

introduce new ones and made it more efficient by leveraging the mobile network to track the movement of money. The user-agent relationship remained the same while the agent-agent relationship was improved drastically. Instead of logging in transactions in a book and settling them at a later date, the ma-payments system allows the agents to settle money transfer instantly. As with all platforms, when a tech-driven payment business is reintermediating an existing payments business, it should try to bring in added efficiency to the transaction without changing the current user behavior drastically.

What is critical (and common to both the above models) is the fact that for even one side of the network to adopt new behavior, the platform should offer significant advantages over existing mechanisms. Square offers better and simpler pricing and the convenience of payments on the go. MPESA offers more efficient transaction settlement between agents.

to

change in user behavior by supporting the existing user behavior through the transition phase.

Any form of payments has to combat a behavioral problem. Hence, building in some form of ‘backward compatibility’ helps spur adoption because the users have the choice to continue with the existing method or transition to the new one. Visa and Mastercard know a thing or two about disrupting the payments space. When wave and pay was introduced, the new cards that were issued supported both swipe (existing) and wave (new) modes of payment. Consumers could continue using swipe until merchants set up wave terminals. Of course, a string of incentives to users of wave helped execute the transition.

In a similar vein, companies like CheckFree provide a comprehensive payment mechanism to consumers while allowing merchants to either migrate to a new system (online payments) or receive checks in the mail like they already have. CheckFree changes behavior on the consumer side successfully because the consumer has the advantage of making one-stop one-click payments. Merchants are allowed the options to continue with the old behavior or adopt a new more efficient one. If CheckFree had insisted that all merchants accept epayments from Day One, it would not have been able to build a comprehensive portfolio of merchants which would have prevented it from gaining traction among consumers.

Payments is a unique space where a change in payment instrument tends to impact both buyers and sellers

and very often, new payments mechanisms fail because they try to change behaviors at both ends.

This makes the payment industry, in general, very difficult to disrupt. In fact, apart from PayPal, no other business has succeeded in finding widespread global adoption in the payments industry in the last two three decades. The key is to ease in one side at a time and not try to create new user behavior on both sides simultaneously.

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HOW ONLINE DATING SERVICES BRING IN THE LADIES!

How dating communities are built and why the ladies

night strategy isn’t enough.

Sangeet Paul Choudary

9 out of 10 dating sites fail not because they cannot get traction, but because they cannot spark interactions. It doesn’t take a genius to get young hormonal men signing up onto a dating site, especially in regions where the gender ratio is already skewed in their favor. It’s much more difficult getting women to sign up at a dating site.

Dating sites are a great example of two-sided markets which, often, rapidly build out traction on one side but fail to get any uptake on the other. Typically, such markets are asymmetrical with one side that is harder to attract (the ‘hard’ side) and the other which is relatively easier to get traction on (the ‘easy’ side).

Members of the ‘hard’ side are more likely to not show up

Given the lack of quality interactions on most dating sites and the general stalker tendencies that seems to take over some members there, women are a lot more careful about joining.

Getting the ‘hard’ side in almost guarantees the ‘easy’ side following in, while getting the ‘easy’ side in won’t guarantee the other side

One might say that since it is so easy to get the ‘easy’ side in, why don’t we get them in and then attract the hard side purely on the basis of numbers. Here’s the dating: Since it is easy to get the easy side in, a lot of other people are already doing that and creating noisy destinations.

You won’t find women signing up just because there is an army of raging men all stacked up on the site. A dating site with real women, on the other hand, almost always attracts men.

The ‘easy’ side desires quality and it is often difficult to get that quality

A great way of solving The Mutual Baiting Problem in such a scenario is to incentivize the ‘hard’ side to join in. Some common incentives could be:

Monetary/Standalone: Chris Dixon outlines this in his article on the “Ladies Night” strategy. Bars and pubs often hold a weekly ‘Ladies Night’ where women get free drinks, tapas, somethingto gather a critical mass of women which would then get men coming in all the more. What works for a singles bar works for a dating site!

Better Experience: The ‘hard side’ would literally pay for a better experience. Since it’s so easy to get men to sign up on a dating site, most dating sites end up getting chock-full of stalkers with poor grammar and (if there’s a video chat component) inappropriately angled video cameras run by inappropriately clad men. The bulk of online dating networks are just so irrelevant that women value relevance a lot more than they would a monetary incentive. CupidCurated is trying to solve for this by letting ‘real women’ curate the membership and determine who does or doesn’t get access to the site. This has helped seed the ‘hard’ side well despite the fact that the initial launch was in a highly single-male-dominated geography (the Bay Area).

While the dating market is a classic example of an asymmetrical market, this strategy works equally well for other markets with a ‘hard’ side. E.g. Luxury Commerce. Targeting high end consumers, especially with niche interests, is difficult. Magazines on luxury travel etc. assemble a market of high-end consumers and use that to attract advertisers. Advertising, of course, suffers from negative network effects but the principle of incentivizing the ‘hard’ side works equally well.

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HOW APPLE DRANK ITS OWN KOOL- AID AND CREATED A THRIVING DEVELOPER ECOSYSTEM

A look at Apple’s early days and the decision to

seed the app store.

Sangeet Paul Choudary

Imagine visiting eBay on day one. You’d have a choice between a merchant and consumer profile and once you set up your profile, you’d realize really soon that the platform was utterly useless if there weren’t any sellers selling their wares.

Platforms face The Ghost Town Problem quite often, not just on day one but all the way till they hit critical mass. The problem is that platforms have little or no standalone value to consumers. Consumers visit AirBnB to rent apartments, Youtube to watch videos and get onto the iTunes app store to download apps. The products on the platform (rental listings, videos and apps respectively) are the ultimate products with which the consumers interact.

What works for the iPhone

When the iPhone launched back in 2007, it didn’t have an app store. In fact, the whole implementation of the iPhone+App Store as a platform showed up several months down the line. But when the iPhone launched without the app store, it still had a basic set of in-house-developed apps which gave it the minimum functionality required from a high-end phone at that time. Rumor has it that Steve Jobs was against opening out an app store to third party developers. We’ll never know whether Jobs was wrong but the app store was a masterstroke for Apple that not only disrupted the entire mobile industry, it also breathed new life into the iPod Touch and eventually, the iPad and the Mac.

Today, the app store is the reason iPhones sell. The design and capacitative screen are great but the iPhone wouldn’t have become such a raging success if not for the fact that its functionality could be extended by the user with a search and a couple of taps.

So this is how Apple solved the mutual baiting problem here. Apple acting as a producer on its own platform launched the iPhone with a few in-house apps, which along with the superior design and hardware, attracted an initial base of users. This initial base of users attracted developers to the iOS platform, eventually fleshing out the app store with apps.

Apple realized that a platform is quite empty without the complementary products (in this case apps). Since the producers producing these products won’t show up until the consumers do (the mutual baiting problem), it makes sense for the platform owner (in this case, Apple) to often start acting as a producer to create value for users.

Content platforms often follow this strategy and set out with creating an in-house editorial to seed the platform with content initially.

Three Scores for Apple

Apple (and in a similar vein, any platform owner) solved three problems with this strategy:

Ensured that the lack of apps didn’t hold back consumers from adopting the iPhone even in the early days Set a standard for producers (developers) in terms of app design and interactions by acting as a producer itself

Introduced consumers to the concept of apps much before the app store got alive and kicking

The Flip Side, though!

When a platform starts out with the platform owner as the sole producer, the addition of new producers provides consumers with greater selection. While this is a welcome change for consumers, it may be tricky for producers, especially those competing directly with the platform owner’s products. Any note taking app released on the iPhone’s app store had to compete with the resident note taking app. While Evernote succeeded despite the challenges, most other note-taking apps never found any adoption.

Has anyone tried doing this?

HACKING YOUR WAY TO CRITICAL MASS Getting to critical mass without scaling big. Is that possible

HACKING YOUR WAY TO CRITICAL MASS

Getting to critical mass without scaling big. Is that possible at all?

Sangeet Paul Choudary

The Critical Mass ProblemPlatforms and networks are not one-sided services provided by a startup. The service is provided by the producers on the platform, and the platform creates value by helping both

sides get together and interact. On eBay, a person looking for Angry Birds inflatable balloons needs to be matched to a person selling them for a transaction to be initiated. On Quora, a question needs to be shown to the closest matches in terms of users who can answer it for the right answers to be sourced.

For a network business to succeed, the right producers need to be matched with the right consumers. The likelihood of having both the right producers and the right consumers for all possible transactions increases as the size of the user base increases. This makes it particularly difficult for a new startup to take off because there might not be enough members of both sides (or in both roles) to spark interactions. Critical mass is the minimum size of the user base at which enough number of producers and consumers exist to spark transactions sustainably.

It’s Not About Scale

What would have been a greater success for Foursquare in its earlier days:

State A: 100000 users with 1000 users/city in 100 cities

OR

State B: 50000 users in New York

Foursquare succeeded because it focused on one city till it reached critical mass. Getting users across

multiple cities would not have helped spark interactions among users leading to low engagement and eventual drop-off.

While it is easier to see the effect of such fragmentation in terms of geo-locations, any platform that doesn’t target its user acquisition activity and its proposition risks ending up in State A above.

Why is it important to reach Critical Mass?

Critical mass is a happy state where:

  • 1. Producers are producing, users are contributing

  • 2. There are enough user-generated content/products/listings to keep consumers hooked

  • 3. Consumers interact with producers and products and return for more

In such a scenario:

  • 1. There is high virility as users start bringing in other users. Producers bring in others to show off their

products/contributions. Consumers bring in others because they get benefited.

  • 2. Retention is higher as users are satisfied

For a business to makes sense, the Cost of Acquisition of a Customer (CAC) should be lower than the Life Time Value of the Customer (LTV). Before a platform reaches Critical Mass,

  • 1. CAC is high because virility hasn’t kicked in and users aren’t inviting other users

  • 2. LTV is low because users who visit and do not see relevant activity abandon the system

Clearly, if this state persists, it results in a drain on resources with low business viability. This is the primary reason why a lot of platform startups never take off and fizzle off after burning VC money.

Hacking Your Way Towards Critical Mass Lowering Critical Mass

Successful companies solve this problem by focusing their initial efforts on user acquisition to create the right mix and lower the Critical Mass required.

This problem is solved by targeting a niche. A niche that has both consumers and producers can support a platform at a lower critical mass. e.g. it is easier to solve a social network targeted at startups with a specific call to action than a general purpose social network.

2. Groupon grew big because it figured an interesting solution to the Critical Mass problem. However, as it soon turned out, the solution wasn’t sustainable. This is the reason why so many Groupon clones mushroomed all across the world (low barrier to entry), but most of them vanished within a few months despite having VC money to burn (owing to high barriers to scale).

Hacking User Contribution

If you are a platform dependent on user-generated content but do not have a distinct producer and

consumer roles, then it is critical that the user on the platform starts contributing to it. YouTube would

have been useless if early users hadn’t contributed. This ties back to The Ghost Town Problem. Hence, it is important to accelerate production by every design hack possible.

Making the users look good is a great growth strategy. Provide them tools of self-expression so they’ll want to spread the word about what they create, and in doing so, about the platform. Youtube’s growth is spurred by every video that goes viral on it. Users, in promoting the video, end up promoting the platform.

Provide Producer-Friendly Infrastructure

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C-level Executive Education

C-level and business leadership-level exec ed towards a platform implementation at a client organization. It may also include workshops for

execution and implementation teams. For larger teams, this may be done as

webinars remotely.

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Commissioned Research

In-depth research, commissioned by the client, to create thought leadership material, layout future industry scenarios or study business model transformation.

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Platform Architecture and Strategy

Engagement on a specific platform strategy and implementation. Includes:

platform business design, layout of feedback loops and network effects, monetization scenarios, management of curation and governance of the ecosystem, data strategy, roadmap creation and metrics definition, among other things. This may be done remotely or in-person or through a combination.

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Retained Advisory

Retained advisory relationships with a specific project (or multiple projects) at a company, or advisory boards, typically structured as 6-12 month retainers.

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Corporate Speaking

Keynote speaking at sales events, executive briefings for C-level execs, and speaking and briefings at executive planning sessions and offsites.

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