Lessons of Greatness: Distribution, Distribution, Distribution

Episode Summary

Many say that in real estate, the key to success is location, location, location. A key lesson of greatness from Reid Hoffman is that for consumer products and network effects businesses, a key to success is distribution, distribution, distribution. In this Lesson of Greatness, I build on this by outlining specific strategies founders can learn from Reid Hoffman to get distribution for their startup ideas. Listen here.

Transcript

Reid Hoffman:

The rule for consumer internet and general rule for most businesses is while the entrepreneurial instinct is build the product, then figure out the distribution. You should figure out product and distribution together.

Mike Maples:

Reid Hoffman emphasizes that for consumer startups and network effects businesses, the key to success is distribution, distribution, distribution, time, and again, we've seen the consumer products that achieve greatness are the ones that get this right. Let's talk about why.

There's an old saying about real estate, which is the key to success is location, location, location. For consumer startups and for network effects businesses, Reid points out that the key to success is distribution, distribution, distribution. Why is this? 

Well, it turns out that in the consumer digital world, the lessons of the real world apply as well. Just like you want to have the right location for your store or the right spot on the shelf for your product, with consumer tech startups, you want to get your product in front of the users you want. There are a bunch of different mechanisms you might use at a given point in time, and there's an art and science to it. But if you can't get a distribution flywheel to work that allows you to spread without spending lots of money, it's game over.

Usually, getting a distribution flywheel involves checking three important boxes. 

First, you want to find a way to leverage existing networks. These networks provide a booster rocket for you to expand. Keep in mind that the best distribution strategies often take advantage of a new network in a new way. Novelty is key to spreading fast. This is what PayPal got right when they piggybacked eBay, providing a new easier way to pay for purchases. Reid and I also discussed Skype, which piggybacked an old school network, the phone system. People were already conditioned by phone networks to call each other, so Skype was taking the same behavior and making it free over long distance, when it had been expensive in the past.

Second, you want to create a mechanism for virality. What is it about your product that will cause people to want to spread the word of it to others in an organic way? This is what Skype nailed. In our discussion, Reid talked about how Skype took off in Europe first, because international fees were a huge pain point for people with family across the European Union. In the case of Skype, it was actually better for them to start in Europe rather than Silicon Valley for this very reason. The value proposition was strongest and most engaging there. Users encouraged their friends and family to use Skype so everyone could save. Everybody involved had a natural incentive and an existing network and behavior, namely making phone calls, to help the product spread.

Third, you want to create a mechanism for network effects. What type of network are you building? How does each new user who is added to the network make it valuable for other users as well? In the case of Skype, it was pretty straight forward. The actual nodes were people who had installed Skype. Each of the connections were two way, since people could send and receive calls. Each new Skype user created a flywheel effect because every current user now had another person they could communicate with on the network.

But there are still other types of network mechanisms. You'll notice that in all of these boxes to check, you're developing distribution hypotheses hand in hand with a strong value hypothesis for each individual user. This is one of the reasons that consumer tech and network FX businesses are hard to build. You have to master them both, the user value proposition as well as the network nodes and connectivity, at the same time.

Why else do people fail to get distribution right with consumer technology and network effects? A common failure mode is many people in Silicon Valley or the startup ecosystem learn the wrong lessons from Steve Jobs. They want to build something insanely great, but just like in the movie Field of Dreams, they think if we build it, they will come. But there's a crucial mistake here. Apple already had distribution when they created the iPhone. They had retail stores all over the place. They had a brand, they had a reputation, they had Steve Jobs. And AT&T was eager to have that product in their stores. In Reid's earlier experience with Social Net, he saw that he had gotten this wrong. He had built a product and then hired people with traditional marketing backgrounds to help him get users. It didn't work.

The second thing people get wrong is many startups are not original enough in their distribution hacks. In 2005, you could persuade people to connect their email contact list to a new Social Network and invite their friends. But soon everybody figured out this trick, and the users built up a natural skepticism to the approach. The consumer innovators who've succeeded, whether it's WhatsApp or Instagram or some of the aforementioned examples, have had to find creative ways to get broad distribution for their products, without spending a lot of money. WhatsApp mirrored Skype with free texting internationally, encouraging friends to connect and spread word of the product. Instagram made it super easy for people to share photos with their friends across multiple social platforms simultaneously.

So how did Reid figure out product and distribution together at LinkedIn? As you may recall from our interview, he purposely launched LinkedIn with a very simple product. He did not repeat his mistake at Social Net. He had a good enough product, but with an equally good enough distribution plan in place. LinkedIn worked by targeting certain types of users who would be a magnet for future users. They knew early adopters would likely be other technology founders, prospective startup employees, and startup recruiters. So they first targeted adoption by venture capitalists. Since VCs compete based on the size and depth of their networks, LinkedIn had a natural value proposition for them.

He also understood that VCs would value the ability to use a service like LinkedIn during the due diligence process when they checked the experiences and references for startup founders, as well as employees when they would help founders recruit. LinkedIn was right that recruiters would follow, which gave even more people reasons to get on board. And they had several viral mechanisms. Whenever a new user signed up, LinkedIn would ask them to invite a few friends as part of the onboarding experience, before they'd even use the product. This was the top way they spread for many years. They also had a viral mechanism where they would invite a new user to connect their email contacts list, and then it would send an invite to all those people. They also encourage you to add your email contact list so they could notify you if one of your contacts joined in the future. This encouraged people to reach out and form connections on an ongoing basis.

You might remember how Reid said in our interview that a good product with great distribution will almost always beat a great product with poor distribution. This is what he was getting at when he says to be distribution led in your thinking. Never treat distribution like an afterthought. If you can't get your product to the people who want to use it on a startup budget, then ultimately you're doomed.

In closing, I would like to offer another technique I've heard Reid talk about that helps get into the right head space for being distribution led:

I've discovered a distribution advantage. What product can I deliver with it?