Andrew Chen examines ‘cold start problem’ for platforms like Uber, Snackpass
How a smart idea gets initial traction is one of the most important moments in any business. It is a confusing, inventive and fascinating time that Andrew Chen spends a lot of time reflecting on.
Chen is a partner of the exceptionally busy and successful investment firm Andreessen Horowitz, aka a16z. He just wrote a book on the subject called The Cold Start Problem, which explains how startups have cracked this code.
He took the podcast and webinar circuit to talk about the book’s highlights, and in the conversation with Stripe, he focused on why early adopters are so important. First users of what, and so important to whom? I know what you mean, but make it clear.
“If you open Dropbox in your office and it’s just empty, no one is using it. Or nobody uses Airbnb, you’re much less likely to use it, ”Chen said. “Your coworker next door who might be excited, even though you’re both excited, but not using it (what does that mean / what is that referring to here?) On the same projects, it just won’t work. “
He has specific knowledge of the gig economy, as he was responsible for growing ridership at Uber and helping the company reach 1 billion rides, then 2 billion six months later. The second billion trips stage was not easy, but it was easier than the first few hundred.
“It’s the cold start problem, you have a phase in all of these products where you don’t have any users, so the product won’t work, but you won’t have any users if the product doesn’t. “Chen said.” Only when you solve this problem can you effectively harness the effects of your network. “
The spark that launched companies like Uber, Lyft, Airbnb and all delivery apps after that has one thing in common, Chen said. He calls it the “atomic network” or the minimum viable network of users to create a stable, usable product on which to scale.
“At Zoom, it’s two to three people; Slack is five to ten people – it’s very important that five to ten people are using it at the same time, you need that dense network, ”Chen said. “For Tinder, they found out they needed 500 people on a college campus.”
Tinder threw lavish parties for these college kids, spending all kinds of money on fancy cocktails at fancy college venues. To enter, they had to log into the dating app. The next morning, maybe after a few hangover pancakes, they started to slip. Today, it’s so ubiquitous that everyone knows what it means to “slide to the right”.
“If you can build an atomic lattice, you can build a second and a third, that’s what you see,” Chen said. “Tinder held college parties to get people to use the app. Then they could throw a party in all these different colleges and eventually they would merge into this larger network. “
He saw Clubhouse’s Atomic Network early on, the live chat platform that exploded onto the social media scene in 2020. Chen was invited when the app only had 100 users.
“We invested in Series A, we invested when there were 500 active daily users. So it was very small, ”Chen said. “But if you’re inside a working atomic lattice, you should be able to tell it is working.” We invested solely on the basis of the idea that this one atomic lattice worked. Even with 500 daily users, we were able to value the company at almost $ 100 million.
Whether you think listening to people chat is worth $ 100 million is up for debate, but there are plenty of examples in the food delivery business. Snackpass is expanding its atomic networks, for example, and Chen sits on the company’s board of directors. The social food ordering and sharing app started on college campuses and is expanding into the real world.
The company’s atomic network started out as a handful of dorm mates. From there he grew viral with very high organic engagement. This led to $ 70 million in investment for the company.
Chen likes to see evidence of these networks and people who stay with the product for the long haul.
“I like to see annual growth of at least three to five times a year, which works out to 20-30% monthly growth. Ideally I want this to be organic pull so that it shows that the product can leverage the network, ”Chen said. “I don’t like when startups donate money to Facebook and Google. And engagement, you like to see really, really high engagement. After 30 days, is it greater than 20%? If they manage to keep 20% of users by day 30, that’s very exciting. “
To achieve massive scale, Chen said the founders should do whatever it takes to create those atomic lattices that lead to pull and then scale.
“How fast do I have to grow to reach 100 million active users? When you do the math, you often find that consumer companies have to hit 100% every year. This is why the tech industry is obsessed with very rapid growth rates, ”Chen said. “It’s not just about accessing network effects, once you get to network effects, you have to figure out how to scale them. “
This may be the subject of his next book, but founders and visionaries have to start atomically to solve this cold start problem.