It Takes:  “#invites/users * #acceptedinvites > 1” to Tango

Andrew Chen wrote a fascinating piece recently on habit forming feedback loops. I suggest you read it. I’ll wait.

Alright, well if you haven’t read it, Chen focuses on 3 key types of “feedback loop” that are essential to growing a social app’s user base, and subsequently increasing its value.

Here are the 3 types of feedback loops he outlines:

1. A feedback loop that rewards content posters when they push new content into the network.

2. A feedback loop that rewards passive content consumers with relevant and valuable content.

3. A feedback loop that rewards (and culls) connections within the network.

Cracking the Chicken and the Egg Problem

But how did they GET THERE?

As we’ve been finding a lot with our current cohort of startups, many appear to be confronted with a chicken-and-egg conundrum. Namely, they will need engaged users to create content and keep the platforms viable, and they will need content to win engaged users. This is a sticky wicket that many social and mobile platforms are currently struggling with. Which of these things comes first? And at first blush, it looks insurmountable. How do you get the equation: “#invites/users * #acceptedinvites > 1” to work when you can’t inspire users to invite friends, and you can’t inspire friends to accept the invitations?

Failing to execute a user-feedback strategy that follows Metcalf’s Law, as Chen points out, will cause the opposite effect to take place: a social network that is losing users is losing value, meaning it loses more users, and is accelerating its loss of value.

However, there is hope.

All Your Base Don’t Belong to Us

I think a fair bit of this startup anxiety about growth comes not from lack of self-confidence in the startup’s abilities, but from pride. In a world of startups where the “me too” pitches flow like Hollywood scripts, a lot of founders are probably afraid of being perceived as derivative, rather than innovative. They tend to see their potential social networks as essentially divorced from, rather than dependent on, the existing ecosystem of competitors. But that isn’t the case at all. The fact that there are 10 Million users in your product category already is a good thing, because it means there are users looking for a product like yours, and there are sure to be a fair number of people who will want the innovation you provide over an established competitor, whether it’s in price, efficiency, or a host of other areas. As we say, if you don’t have competition already, you almost certainly have no market, just a piece of technology looking for a problem.

Tending An Unwalled Garden

So it’s important to understand, if you want to initiate feedback loops that will actually continue to grow, a number of things about your market and your target users. And it’s also important to understand how those users differentiate themselves. Luckily, most of the users a new social network would want to attract are *already* seeking the features or the community your new network would provide, and they are probably already doing what your network will allow them to do more cheaply, more quickly, or more efficiently. Your garden needs to have doors to other networks- they just need to be in the right places.

There are 3 basic types of users for a social network, one for each type of feedback loop: the content creator, the content curator, and the “lurker,” or content consumer. They’re often described as following the 1/9/90 spread, meaning that there are 9 curators for every 90 consumers, and 1 creator for every 100 total users. That means on any typical social-based app or platform, 1% of users will actively generate compelling content (hopefully), 9% will engage with that content actively (sharing, curating, editing, recommending, commenting), and 90% will view the content, and take no other actions.

Each of these user groups carries out a vital function, and their activities feed each other’s loops. Each social-based network has particular strengths. A content creator can be rewarded for the total size of her audience (Youtube profit sharing is an example of this), encouraging her to create more similar content. At the same time, viewers can be rewarded by a cornucopia of fresh content that they enjoy, presented to them every time they log in. Content curators, editors, mavens, and social butterflies, the 9% of users who can be relied on to share knowledge with others, can be rewarded in a few ways: some networks, like Facebook, reward this type of behavior with positive reinforcement: your attempts to join the conversation garner positive likes, making you feel like a content creator, without the hard work involved in actually creating the content you comment on, or share. Others reward this behavior through enhanced perception of status: followers on Twitter, or a rough prestige score, or a rank, such as those employed by some fan forums, or curation-heavy services like delicious and Scoop.It.

Keeping these three interests in balance is an important, and ongoing process. Facebook users will recall the deluge, reaching its peak around late 2012 and early 2013, of “content creators,” who were actually content curators sharing memes and jokey posts on Facebook, in an effort to drive ad-supported clicks to their sites: 9-gag, Upworthy, and others were the biggest culprits of this kind of “click-bait” exploitation of the Facebook platform. They were leveraging real content curators, the users who enjoy sharing with friends, to gain access to passive viewers. Facebook responded by raising the barriers to virality for that kind of content: stopping shallow or non-rewarding content from swamping the typical newsfeed.

Respect Your User’s Roles

It’s important to keep in mind that most of your users will not want to be active creators of content, or to take any active roles, in a social platform. A lot of founders are probably in the smaller cohort of curators and content creators, and don’t empathize with passive users. And this doesn’t just apply to startups looking to create social platforms. The ghost-town that is Google+ fell victim to a super-user mentality that was baked into its product DNA , and from which it has never recovered. When Google+ was ready to switch on for ever user, even forcing users of affiliated services to have a Google+ profile, there remained no focus on rewarding them for the types of users they were. It remained an exclusive club, that everyone was forced to attend. When Google’s attempts to enforce their own culture on their users don’t come off as corny, they seem frightening. That’s not how you want to be perceived.

Don’t be *that* app

Instagram and Facebook both focus deeply on the rewards users get from generating content, but they don’t pester their users with reminders to use the service. Content creation is both stupidly easy, and uncannily rewarding. Others, Twitter for example, offer virtually no rewards for content creation, de-emphasizing depth of content through artificial restrictions, but focus heavily on curators, pushing their few active curators to gain followers and increase their profile, and leveraging large numbers of passive browsers to make that process rewarding. Still, Twitter allows its user-base to segment itself easily, relying on hashtags to make curating and browsing content seamless, and encouraging special interest communities to form in ways they can’t on Facebook. Interest is prioritized over relationships from user to user. The mix that you attract will be unique to your platform, but the platform should still be balanced toward the 1/9/90 paradigm, or it will likely not grow organically.

The question came from one of our startups quite early, on Day One, in fact. A team asked whether they would be signing any NDAs with our mentors. The answer is no, they won’t, but in the interest of clarity, we thought we’d make it clear what our view of NDAs or “non-disclosure agreements,” is.

A lot of startups are familiar with NDAs, and their members have probably signed one or two in their time. I’ve signed a few myself. But they aren’t worth much, particularly to a startup, for a couple of reasons I’ll lay out here.

They’re Worthless To Founders

You may have signed an NDA as an employee or contractor for a medium to large-sized company. In the context of corporate legal departments, an NDA makes a sort of sense. It is a piece of the due diligence of any company to show, through their normal procedures, that they value their proprietary information and practices, and are willing to defend them when necessary. Not to do so, in that context, would leave a larger company, and its legal officer, in danger of being found negligent, should legal action need to be taken against an employee who steals secrets, or leaks information.

On its own the NDA is not a powerful legal document that grants the company a right to control what you say, but it gives the company cover, in case an employee decides to really abuse their insider knowledge. But that arrangement is for employees and close partners, not for outsiders like investors. The only across-the-board exception to this general rule is for sensitive, one-time events like mergers or acquisitions, in which the details of the deal leaking could present major headaches for investors and companies both. In that case, NDAs are common, and not far-reaching in their scope.

All contractually obligated not to listen to your pitch

VCs Won’t Sign Them Anyway.

And with good reason. A VC may hear 50 pitches in a week. And even if he hears only 2, there’s always a chance that your pitch, and the next company’s pitch are similar. The VC would open himself up to unnecessary risk by signing an NDA with you, if he knows that tomorrow, somebody presents him with a similar, but possibly better, idea. The value is in the team that is receiving the investment, and how they are executing their plans, not in the idea. That is virtually always the case. And VCs know this, and don’t want to be barred, possibly for life, from dealing with companies that do things similar to what your company does. By the same token, you wouldn’t want a VC to say: “I won’t invest in you because I’m afraid of legal action on the part of one of your competitors.” Does that sound fair to you?

It Makes You Look Arrogant

Contrary to most of our wishes about ourselves, our ideas are not usually all that valuable. So unless your pitch or your presentation to an investor includes earth-shattering news that simply must not be leaked for fear of some catastrophic consequence to your business (for example: you’ve invented cold-fusion, or you have created The Singularity), you’re likely to come off as an arrogant jerk for making a VC sign an NDA to hear your idea for the next Candy Crush Killer. StartupLand, however it may resemble Hollywood these days, is not dealing in tentpole movie releases, and VCs are not leaking screeners to Pirate Bay.

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Being a successful entrepreneur is hard on its own. So being a failing entrepreneur is harder still. But as entrepreneurs, startup founders should be prepared for failure, just as much as they should be prepared for success. Failing well, though may seem like something nobody wants to know how to do, is how an entrepreneur sets him or herself up for future successes. In a game of high risk and high reward, you lose more often than you win, so losing well is key.

Here are a few of the hardest ways to fail as an entrepreneur, and what you can do to salvage something from failure.

1. Do Everything Right, and Still Fail.

Apollo 13: Some failures you can be proud of.

I was fascinated by the recent demise of Outbox, a startup that promised to digitize and streamline the postal experience in the United States. By most accounts, Outbox did everything right. They had only 2,000 paying customers in one market (Austin, Texas) at their peak, but they had enormous brand recognition in the United States, and a waiting list of 25,000 customers in several other markets, including San Francisco. The company’s original goal was to partner with the USPS, and reroute customer mail to a local warehouse, which would digitize and digitally transmit user mail via email. Important documents could then be selected for delivery.

Long story short, the USPS killed the partnership when they realized Outbox’s potential for destroying the direct mail marketing business, by unsubscribing customers from mass mailings, costing the USPS potentially millions of dollars a year. An outmoded and failing government enterprise killed a cutting edge and potentially thriving new market, to secure an already weakened profit stream. Without the partnership with the USPS, Outbox would never be able to support customer acquisition costs and improve service density to the break-even point, much less profitability.

What you Can Learn From It

What killed Outbox was more than a structural problem. On the surface, the cycle they faced looked a lot like Pets.com, a popular, attractive, effective business from the consumer point of view, that just happened to cost the company more and more money, the more customers it managed to gain. But this failure was not founded on the idiocy that defined the rise and fall of Pets.com. Rather, Outbox made smart and effective investments into technology, a complex backend that worked well, and a level customer service that won them a lot of affection from customers. They did most things right, but it just turned out that doing most things right wasn’t enough to make money, or even to get back the investments they’d made.

The post office has been around for 300 years in the US, and so they were late by a few centuries. Even a vastly superior product has a hard time competing with that kind of a lead to market. But the founders of Outbox can leverage these innovations, and pivot towards a more profitable vertical, which is what they intend to do. If you’ve done everything right, you’ve put in the hours, and you’ve treated customers with respect and caring, and built a product that works well, it can’t ever be a complete failure. There will always be something in it that is of value. Possibly far more than you would ever have anticipated. Sometimes a product or service is just way ahead of its time- but the knowledge and connections gained, even in this failure, may well lead to something even better.

2. Do Everything Wrong

As Paul Graham of Y-Combinator is fond of saying, most often, an idea that seems bad is actually a bad idea, or even if it is good, it may be fundamentally unworkable as a business. Or it may be impossible to grow. It’s the black swan, the idea that can work as a growing product and as a sustained business, that VCs look for, and that startups try to become. Because the best startups are ideas that seem bad, and are actually brilliant. Dropbox entered a geeky, techy marketplace, and delivered a product that my mom uses. Facebook entered a marketplace in which Myspace predominated, and beat them by being *less edgy*. WhatsApp was acquired for 11 figures for its take on an app that has been around since before smartphones. Those all seemed like loser ideas at the time, but there was something about each of them that just worked, from their marketing, to their backend, to their core concepts. They appealed on some level that allowed them to ignite and grow in a way that all their competitors failed to do.

But most of the time, perhaps 99% of the time, entrepreneurs will be involved in “all their competitors” and not in the one app in 100 that makes it to a massive acquisition or an IPO. Everyone here at StartupYard has been involved in one of these types of failures. The idea is good, but it depends too much on a community that doesn’t exist. Or the community exists, but no amount of pivoting seems to open a sizable, sustainable revenue stream. Or, after funding has come and gone, it’s found that the increase in size and revenue has still not yielded a profitable business.

What You Can Learn From It

Learning how to walk away from this kind of experience is painful. Especially when you’ve created a product that thousands of people really do use and love. But if you can’t make the business profitable, and you can’t make the business grow and open up new opportunities for profit, then you’re losing. No matter how slowly, you’ll still lose. So moving on and licking your wounds is an important lesson that most of us have to learn at one time or another- rather to own up to these mistakes and miscalculations as soon as possible, and move on with your knowledge and experience to something that has a chance at changing the world.

3. Cheat, and Fail

Cutting corners and massaging the truth are attractive options for any startup with big ideas and not-quite-big-enough results. “Fake it till you make it,” is a truism among startups, but that’s a mentality more than a license to bend the truth.

Most of us have lied at one time or another, either to get a job, or to keep it, to get something we thought we deserved, or to keep from losing something we really didn’t. Very often, these little lies don’t come back to haunt us.

Colors is a great example of a startup’s chickens coming home to roost. Having pitched a totally unproven technology with a poor UI and poor user statistics for $41 Million in silicon valley, Color was in deep trouble two years later. Court cases and allegations later revealed a history of poor management and alleged fraud against employees. It bears repeating, now and always, that a high valuation for a startup does not make its founders rich. If anything, it has to potential for exploding a bubble, if there is one. if a company is based on lies and innuendo instead of fundamentals, eventually everyone will realize this. Unless you’re Frank Underwood  in House of Cards of course. In which case, this never happened.

What You Can Learn From It

But if you actually intend to achieve the success you would like, you should expect that everything you say will, at one time or another, be scrutinized. Whether it’s embellishing your own resume, like Yahoo’s Scott Thompson, or lying about your metrics, to telling your investors that you’ve made more progress than you really have, the truth will eventually out. So cheating early is a guarantee of problems down the line.

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