15 points to reveal the “Launching a Startup is easy” myth. (1/15): Critical mass is absolutely necessary

Posted on July 26, 2008
Filed Under Startups

In the last few weeks I have been busy doing a number of different things that prevented me from writing posts on businesshackers. I appreciate my faithful readers for patience and kindness. Today I would really share some thoughts on how to successufully launch and manage startups. It is not exactly what I do in my everyday life, but after few years reading and writing about startups I hope I can provide some suggestions. I will share 15 tips that might turn out to be useful both in case of fresh new projects and projects launched some time ago. Today I will describe only one of the the so keep on reading my next posts on this subject

1. Critical mass is absolutely necessary.

From my observation I can tell you that this point is essential. Let’s imagine that we go back to the time Youtube was not invented yet. You are the one who comes up with a fantastic idea. You want to allow everyone to videos and upload their own videos. You launch this project in your garage/studio and after 14 days you realize that CNBC prepared a show to present this great idea. Believe me or not it will take less than a month to have someone copy your project and invest in hardware/software that will be far more powerful than what you have. “Catch up effect” will start and three possible scenarios can occur:

a) “catch up effect” < word of mouth –> this basically means that people started talking about your project and you are likely to stay number 1 in your category. It’s very hard to achieve such a position, but possible. Two examples are Digg (especially for American users) and Wykop, which is probably the best Digg equivalent for Poland. Competitive advantage comes from the fact that you were the first to start something and the first to believe that it makes sense to invest in it. Let’s call it “first mover advantage“. From my personal experience I can tell you that clones usually do not work. Some time ago you remember I launched a Digg clone that was created to give prizes to guys that were the most active on the site. I was determined to give books, movies, etc. to those who Dugg stories and submitted new ones most actively. It turned to be a bad strategy. No one wanted to give up Digg, Reddit, Mixx or Propeller in order to join my site. I was really disappointed. but in fact it was a good lesson. It’s not easy to drive traffic to your site and it’s even more difficult to mantain it.

b) word of mouth < “catch up effect” –> that’s exactly the other way round. If you take 95% of startups and you use Alexa or Compete to analyze traffic (popularity) you will draw the following conclusion: “it takes less than 3 months for the average startups to be forgotten”. You will always think that you are going to be in the 5% rather than in the 95%, but that’s not exactly true. Any Venture Capital company in the world will explain this concept in the same way. Only few succeed and that’s why it’s worth having a diversified portfolio

c) word of mouth = “catch up effect“–> I would call it “perfect equilibrium”. It means that even though you are not in case “a” you are still likely to be one of the main competitors on the market. In Poland for example there are three social lending sites that have moreless the same positions and more less the same chances for further development: Monetto, Finansowo and Kokos. “Perfect equilibrium” is defined as 33, 33 and 33% market share. Innovations and additional (external) funding may change things quickly, but the “products” remains essentially the same.

Let’s put it simple now. Critical mass is “the minimum number of users you need to attract and mantain” in order to efficiently launch and run a startup. I would say that it’s similar to a break-even point that must be achieved so as to make your project look good. Three more things to remember:
* achieving “critical mass” in a niche is relatively easy – don’t try to “fight with the big guys if you are not one of them”.
** it takes time and money to promote a startup, especially at early stages (I will discuss this topic in detail in the nearest future)
*** never forget about the power of networking; it will save you both time and money.