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Flywheels - The Unstoppable Force of Growth

Deepak Singh
Sep 20 10

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If you are new here, here are the top 5 posts of this newsletters so far

1. Measuring Product-Market Fit

2. Understanding Positioning: Through a Practical Lens

3. How to Engage Users Through Gami cation

4. Referrals: The Holy Grail of Growth

5. Decoding Growth: Where is the Growth Coming From?

O to the topic,

Last week, we discussed growth loops and where to nd them. The post generated good
discussions, and I am grateful for folks providing inputs and making it better. Please keep
them coming :)

This week I am going to touch a topic o en confused with growth loops — Flywheels. The
reason for this confusion is simple; they look and feel the same. But as it happens with
frameworks, the real value lies in nuances of these frameworks. So if you want to apply the
Flywheel concept, it’s better to understand it well.

Jim Collins even wrote a book about this, Turning The Flywheel. Below is an excerpt from his
book about Flywheel where he explains the Flywheels concept.

Picture a huge, heavy ywheel—a massive metal disk mounted horizontally on an axle, about 30
feet in diameter, 2 feet thick, and weighing about 5,000 pounds. Now imagine that your task is to get
the ywheel rotating on the axle as fast and long as possible. 

Pushing with great e ort, you get the ywheel to inch forward, moving almost imperceptibly at rst.
You keep pushing and, a er two or three hours of persistent e ort, you get the ywheel to complete
one entire turn.

You keep pushing, and the ywheel begins to move a bit faster, and with continued great e ort, you
move it around a second rotation. You keep pushing in a consistent direction.  Three turns ... four ...
ve ... six ... the ywheel builds up speed ... seven ... eight ... you keep pushing ... nine ... ten ... it
builds momentum ... eleven ... twelve ... moving faster with each turn … twenty … thirty … y…
a hundred.

Then, at some point—breakthrough!  The momentum of the thing kicks in your favor, hurling the
ywheel forward, turn a er turn ... whoosh! ... its own heavy weight working for you. You're pushing
 no harder than during the rst rotation, but the ywheel goes faster and faster.  Each turn of the
ywheel builds upon work done earlier, compounding your investment of e ort. A thousand times
faster, then ten thousand, then a hundred thousand. The huge heavy disk ies forward, with almost
unstoppable momentum.

Remember the words ‘unstoppable momentum’ when you think of Flywheels.

Limitation of Loops and Birth of Flywheels

‘Yo’ will forever be remembered as the app that was too simple. It lets users do exactly one
thing: say "yo" to each other.

Despite its simpler premise, the app had strong growth. The app quietly launched in April of
2014 and grew. In July, the app got $1.5 million in funding from investors. By September, the
app had 2.7 million registered users and 1.2 million monthly active users.

Fast forward today, the app still lives. But ‘Yo’ is asking users to donate to its Patreon to keep
the app alive. From the Play Store description of the app
Does ‘Yo’ have a growth loop? It does. Here is its growth loop.

A growth loop brings new users to the platform as it did for the ‘Yo’ app. But it does nothing
about retaining them. So even if a product has growth loops, it may or may not have
sustainable growth.

This is why we needed a new tool to think about sustainable growth — Flywheels.

Flywheels
The term comes from physics — a ywheel is a mechanical device speci cally designed to
e ciently store rotational (kinetic) energy. The key idea here is that Flywheels resist changes
in rotational speed (ω) and momentum by their moment of inertia (I), meaning once they are
in motion, they are di cult to slow. Here is a 1- min short video explainer on this.

Working of Flywheel | Theory of Machines

In the startup world, this implies ywheel-like products gain enough momentum and it
becomes their moat over time. It’s hard to beat/slow their ywheel of growth.

Back in 2014, when Uber was valued at tens of billions of dollars, there was a lot of criticism
from valuation experts. Famous investor Ashwath Damodaran wrote

Earlier this month, investors poured $1.2 billion into Uber, a tech company whose smartphone app
connects taxi drivers to passengers. The share of the business these investors received suggests that
Uber is worth $17 billion, a mind-boggling sum for a young company with only a few hundred
million dollars in revenue.

An equally compelling response came from one of Uber’s earliest investors, Bill Gurley. This
tweet exchange between David Sacks and Bill sums his response.
This tweet explains why Investors got bullish on Uber. I will take a minute to elaborate on the
drawing that David Sacks shared.

1. As more users join Uber, more drivers will come looking for them.

2. The geographic density of Uber increases, i.e. more uber drivers and riders in an area.
More driver density would mean faster pickup —> even more users will start coming
for faster pickups

3. More users will lead to more # of rides for a driver. More rides —> better income. So
they can a ord to lower the prices.
All of it becomes a virtuous growth cycle. Lower prices and low waiting times will keep users
on the platform. As the users are on Uber, drivers will also be on the platform. The lockin will
keep Uber’s ywheel in motion over a long period of time. Long enough to weed out any
competition, and build a sustainable company.

Today Uber is valued at $65 B in public markets. Whatever one’s feeling is about Uber's
valuation, it de nitely changed the world. Flywheels o en do that as we will see next.

Superimposition of Loops = Flywheel Effect

In the last post about growth loops, we discussed the superimposition of loops. Flywheels
o en have multiple loops/wheels and can be seen as a superimposition of loops.

Let’s take the best Flywheel built to date to understand this — Amazon. An excerpt from the
Amazon website which explains how Amazon grows.

Amazon is built on the concept of a virtuous cycle focused on the customer. The idea was
constructed on a napkin by CEO Je Bezos, and still remains a living, breathing part of Amazon..

Je Wilke explains the meaning of the virtuous cycle in this video.

The Virtuous cycle

To break various loops/wheels in motion

1st loop is around customers and seller growth

Customer Experience (CX) —> More Customers —> More Sellers —> More Selection —> CX

2nd loop is around prices and cost structure

More Customers —> Lower Cost Structure —> Lower Prices —> Better CX —> More Customers

3rd important loop not listed above is around delivery time :

More Customers —> Better Logistic Network Utilisation —> Lower Delivery cost +Faster Delivery —>
More Customers

The ywheel also has multiple actors like sellers and buyers dependent on each other and
creating lockin with each other. And it’s not just Amazon. Best marketplace models are o en
ywheels with multiple actors. Examples - Uber (riders and drivers), AirBnB (host and guest),
AliExpress (buyer and seller), Swiggy (restaurant, buyers), UrbanClap (service providers,
buyers), Angellist (investors, startups), etc.

Key to Building Flywheels

Flywheels are all about building advantages. A good list of advantages always comes handy
when thinking about Flywheels. Here are the 6 most common advantages -
1. Direct Network E ect examples are telephone networks, the Internet, Facebook,
WhatsApp, etc.

2. Economies of Scale can be seen in many so ware companies. This is because most of
their costs are  xed. For example, Google costs come mainly from servers and so ware
development, and these do not increase with the number of users. Every additional
search lowers the average cost of a search. Examples of companies pro ting
extensively from Economies of Scale are Google, Facebook, Salesforce, Amazon,
Net ix, etc.

3. 2-sided Network E ect can be seen in marketplaces like Uber, Airbnb, AliExpress,
Amazon, Swiggy, UrbanClap, Opentable, Angellist, etc. Recently, it has also happened
on social network apps like Instagram with the advent of micro-in uencers. Users and
micro-in uencers create 2-sided network e ects.

4. Switching Costs examples include SaaS companies like Salesforce, Intuit, Microso ,
etc. These are mostly unique to products where you can use only one of them at a time.
Though B2C companies build switching costs by creating loyalty programs. Amazon
has done a fabulous job with Prime, which has an annual churn of 9% only.
 5. A brand habit example is Apple. Other companies with strong brand habits are
Disney, Tesla, and Nike.

6. Proprietary tech in so ware companies is mostly in the form of data-based AI/ML

algorithms. Google’s search, Net ix’s recommendations, Amazon product search and
recommendations, Alexa Skills, etc. are some of the examples. In absence of big data,
it’s hard to build this advantage. Though hardware products like Apple and Samsung
also rely on hardware or design patents to build an advantage.

You may have noticed a few names appearing multiple times. This is because of the more the
advantages the better the ywheel. Let’s see a few examples

1. Uber checks 3 of 6 advantages — 2-sided network, brand habit, proprietary tech like
surge pricing

2. Amazon checks 5 of 6 advantages — 2-sided network, economies of scale, switching

cost through prime, brand habit, proprietary tech like the recommendation and
product search, AWS, etc.

3. Youtube checks 5 of 6 advantages — 2-sided network, economies of scale in CDN costs,

switching cost for creators as one has to move subscriber base, brand habit, proprietary
tech like a recommendation, and product search.

4. Apple checks all 6 of 6 advantages — 2 sided-network of app developers and iPhone

users, economies of scale in manufacturing, direct network e ect to some extent, high
switching cost due to familiarity of the interface, strong brand habit, proprietary tech
on hardware and design.

5. Tripadvisor checks 3 of 6 advantages — 2 sided-network of users and travel

commodities, economies of scale high as the cost is limited to so ware development
and the content is user generated increasing the marginal ROI of TripAdvisor
manifold, strong brand presence as it keeps appearing on the rst page of your search
results when it comes to travel.

Differences: Loops and Flywheels

At the start of this chapter, we said that Loops and Flywheels are di erent. Now we have seen
that ywheels are o en a superimposition of growth loops. So how are ywheels and loops
they di erent? Why do we need two di erent terms when thinking about the growth of the
product?
To understand that, let’s look at the products which grew due to growth loops but zzled out
in lack of ywheel

1. We have already discussed the Yo app. Yo had 1 of 6 advantages — direct network

e ects. But a lot of users don’t nd Yo useful, so the direct network e ect is also
limited. Is it a wonder that it failed?

2. HQ Trivia is another example. It was a popular live quiz show where you could earn a
life by inviting friends. So it built a viral growth loop and grew to > 2 million DAUs.
But because of the lack of any of the advantages (0 of 6), it fell fast and fell hard.

3. Vine, a popular video loop app that o ered creators the ability to make and share six-
second videos similar to TikTok, had 1 of 6 advantages — direct network e ects. For a
short period, it also had another advantage, i.e. 2-sided Network E ect. In 2016,
Twitter announced that it was shutting down Vine. The app couldn't compete with the
rising popularity of Instagram, and users who were once considered as Vine celebrities
started posting videos on Instagram. Why did Tiktok succeed, whereas Vine failed?

Vine versus Tiktok

Failure to make money for Vine and Creators, Scale, UX — From TheVerge

Years of executive churn likely contributed to Vine’s failure to make money. For a while, brands were
happy to pay Vine stars directly to make ads and share them to their millions of followers. But a er
Snapchat and Instagram grew into hundreds of millions of daily users, marketers’ interest in Vine
dropped signi cantly. They had once longed for ways to grow their own followings on the app —
through paid placement o erings similar to Twitter’s promoted tweets and promoted accounts.But
Vine never came through with any options, in part because the founders resisted monetization from
the start, sources said. It never took a cut of stars’ deals with brands

TikTok is the overseas version of Douyin by Bytedance.

There were about 400M users of Douyin in China. More importantly, China had a developed
business ecosystem formed around KOLs (key opinion leaders) who made their livings online
by creating short videos for brands, etc. TikTok allows creators to monetize their own content,
and it's got more tools for creators to customize or collaborate on content.

The tools built by Tiktok for creators to make good content and collaborate are pretty good.
This means delightful content for the end-users.
The scale allows Tiktok to built a much better content recommendation engine, which is a key
strength of Bytedance. The scale of Tiktok also creates a 2-sided network e ect.

All-in-all, Tiktok checks 5 of 6 advantages

1. The stronger 2-sided network e ect between users and creators

2. Direct network e ect built by users sharing these videos with each other

3. Economies of scale due to user-generated content (UGC)

4. Switching costs for creators in the form of losing money if they leave the platform

5. Proprietary technology like recommendation engine which will get better with more
users and more usage

Loops vs Flywheels
Looking at these examples and what we discussed before, we can identify a few key di erences
in Loops and Flywheels:

1. Flywheels are superimposed loops/ multiple wheels interacting with each other. Loops
can be seen as a subset of Flywheels.

2. Loops with shorter cycles can make a product viral and it grows very fast like HQ
Trivia and Vine. But if it gains none of the advantages of Flywheels over time, it has a
high chance of failure. A key di erence between loops and ywheels is the cycle time.
Flywheels have a longer cycle time because of the completion of a cycle is dependent
on multiple actors in the system. As the old adage goes, “Anything worthwhile takes
time to build” 😊
3. All Flywheels build sustainable businesses with high momentum. The momentum can
serve as the moat for the business as it takes a long time to slow down. Few loops build
a sustainable business and the ones that do have long cycles in themselves. UGC loops
translating to SEO bene ts have a long cycle, same is the case of paid marketing where
the LTV exceedeeng CAC will have a long cycle.

4. The feedback cycles are also longer in Flywheels. Even if something breaks, it’s barely
noticeable initially because of high momentum. So such products should always de ne
leading indicators of business and growth like NPS, rating, etc. Lagging indicators like
revenue and pro ts start showing signs of worry when it’s too late.
Please note that ywheels and loops do overlap. It’s hard to establish clear distinction at
times. But that’s the beauty of frameworks and tools, you should have as many in your
toolbox. So get a good grasp over both of these tools while cra ing a growth strategy 🚀
So what’s stopping your product from creating a Flywheel? DMs open on both LinkedIn and
Twitter for any discussions.

See you next week. We will start the topic of Onboarding and Retention from the next week.

Sincerely,

Deepak

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