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 Forums 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 Forums 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 ABOUT PLATFORMATION LABS

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.
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.
 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 wont 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 isnt 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:

Providing a bait to consumers

Providing a bait to producers OR

Simply providing a bait to whichever side is the most difficult to seed

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, dont 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, dont 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

Successful platforms overcome the ghost town problem by either creating the complementary products
themselves or incentivizing producers to create the complementary products initially.

Provide a service for producers that enables them to interact with their consumers

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

Signal relevant activity

Get a marquee player

Convert consumers to producers

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

Seed the producers on standalone mode

Act as a producer on your own platform

Consumer-First

Heavily incentivize the consumers

Both Sides Together

Provide a single-user utility and move to a multi-user mode (App to network)

Focus on a niche and serve it really well

Make a two-sided platform one-sided

Dont try to change behavior on both sides simultaneously

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

This problem is solved by targeting a niche.

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

Exploit underlying network structures

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
YouTubes 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 platforms strategy.

Kim Dotcoms 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 youre faking it, you might as well offer the best. Megaupload knew that Collective Souls music videos
would drive more traffic than some home video of a puppy snoring in a bathtub. Dating services know what men
want (who doesnt) 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 youre inventing supply or demand and dont 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 youre looking for are users who can churn out some activity for cheap.

Embrace non-scalable

Scalability rocks! I mean its 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

The reason [Facebook] went in through college was because college kids were generally not Myspace
users, college kids were generally not Friendster users Nobody actually believed that 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 Facebooks 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 Zuckerbergs 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 whos 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 wont 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

Whats 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 Tencents 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 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. Its 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

Lets 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 youre 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 youre 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 arent 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 Im 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 wont 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, launching at a tech conference may be a bad idea unless
you can leverage organic interactions at the event.

Sangeet Paul Choudary

If youre running a tech startup, youve 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, theyre 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, theyll 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 youre building something that relies on network effects, launching at a tech event isnt
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?

Twitters breakout moment was the 2007 SXSW conference. While Twitter had been live for more than nine
months, prior to the conference, it wasnt getting much adoption. Twitters 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 cant 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 didnt
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 didnt 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 dont 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, Tinders 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 cant gain traction by traditional marketing; the network
effect simply wouldnt 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. Facebooks launch in Harvard created a concentration in space while Twitters 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!
 THE SECRET TO SCALING
$
SOCIAL NETWORKS AND
LOCAL MARKETPLACES
Why some social networks scale and others dont.

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). Ive talked at length about this in earlier posts, but heres 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. Lets 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. Lets 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, its 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.
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 arent 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 isnt 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 dont 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. eBays 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 youre 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
hadnt 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 isnt universal. Not all social networks grow exponentially.

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

3. Groupons National deals helped kickstart new markets.

 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 worlds largest
provider of accommodations without spending even a fraction of what traditional hotel chains spend in
marketing.

Marketing is dead! Or thats 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 phones organic network, the phone book, to create networks
native to mobile,

If youre building a social network, marketplace or platform and you havent 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 theres 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 Facebooks 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

Successfully piggybacking a network is more complex than simply choosing a network and executing an API
integration. A startup looking to piggyback on an underlying network needs to understand the nature of its
relationship with that network.

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, Facebooks 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 dont.

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 Guests 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.

Airbnb reverse-engineered a de facto integration with Craigslist and offered users on Craigslist, an alternate,
more convenient and safer destination for their interactions. Airbnb stole the network interactions away from
Craigslist and was promptly blocked by the Host as soon as it realized what was afoot.

Skype, Viber, and WhatsApp have similar relationships with carriers where they piggyback the connections
created by the carriers (via the users 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 Hosts 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 doesnt want to build its own music library, and Spotify isnt
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, theres a window while it will be effective. When the host doesnt want it, theres a window before
which the host wises up. In either case, being first helps.

The story of many of todays 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 Squares reader take the company and why OpenTables 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 arent 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, didnt 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 isnt 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
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 IMPROVED MECHANISM FOR PRODUCERS TO INTERACT WITH EXISTING

CONSUMERS

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 ones 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 doesnt 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 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. Thats largely the reason why NFC-
enabled Payments still hasnt gone away. Consumers wont go out of their way to get NFC-enabled
phones unless there are enough merchants accepting them and merchants dont 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

Thats 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 users 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.

Joel Spolsky refers to this phenomenon in the technology space where he refers to it asbackward
compatibility. Essentially, backward compatibility is simply a conscious platform decision to ease a desired
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.
 HOW ONLINE DATING
SERVICES BRING IN THE
$
LADIES!
How dating communities are built and why the ladies
night strategy isnt enough.

Sangeet Paul Choudary

9 out of 10 dating sites fail not because they cannot get traction, but because they cannot spark
interactions. It doesnt 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. Its 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 wont guarantee the other side

One might say that since it is so easy to get the easy side in, why dont we get them in and then attract the
hard side purely on the basis of numbers. Heres 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 wont 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, something to 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 its 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 theres 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 doesnt 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.
 HOW APPLE DRANK ITS OWN KOOL-
AID AND CREATED A THRIVING
$
DEVELOPER ECOSYSTEM

A look at Apples early days and the decision to

seed the app store.

Sangeet Paul Choudary

Imagine visiting eBay on day one. Youd have a choice between a merchant and consumer profile and
once you set up your profile, youd realize really soon that the platform was utterly useless if there
werent 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 didnt 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. Well 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 wouldnt 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 wont 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 didnt 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 owners products. Any note taking app
released on the iPhones 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 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.

Its 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
doesnt 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 hasnt kicked in and users arent 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 wasnt 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 hadnt 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 theyll
want to spread the word about what they create, and in doing so, about the platform. Youtubes 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

Critical Mass is also gained at a faster pace if the platform is designed in a way that theproducers bring
in the consumers. This is best achieved when your platform provides the means to distribute
content/products (e.g. embeds from YouTube) and the ability to interact better with consumers (e.g. m-
Loyalty)
ENGAGE FURTHER
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.
Commissioned Research
In-depth research, commissioned by the client, to create thought leadership
material, layout future industry scenarios or study business model
transformation.
Corporate Speaking
Keynote speaking at sales events, executive briefings for C-level execs,
and speaking and briefings at executive planning sessions and offsites.
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.
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.
To engage further, please write in at the
following:
sangeet@platformthinkinglabs.com
liz@platformthinkinglabs.com