20VC Why, How and When To Think About Growth Teams, The Right Way To Think About Network Effects & Scaling from Phase 1 To Phase 2 of Startup Life with Anu Hariharan, Partner @ YC Continuity Fund

In this episode of 20 minutes VC, host Harry Stebbings interviews Anu Hariharan, a partner at Y Combinator's Continuity Fund, discussing her journey from an electrical engineer to a venture capitalist, with experience at Andreessen Horowitz and Boston Consulting Group. Anu emphasizes the importance of a strong management team and sustainable business models as common factors in successful startups. She delves into the nuances of network effects, stressing that user retention and product virality are key indicators of a company's potential to scale. Anu also touches on the critical role of growth teams in realizing network effects and advises on the timing and pitfalls in establishing such teams. Additionally, she highlights the need for CEOs to evolve from product-focused founders to company builders, capable of learning and making quick adjustments. The conversation also covers the global tech landscape, with Anu predicting a tech triangle between Silicon Valley, Beijing, and Bangalore.

• Harry Stebbings introduces the show and invites listeners to follow him on Instagram.
• He announces Anu Hariharan, a partner at Y Combinator's Continuity Fund, as the guest.
• Anu's background includes working at Andreessen Horowitz and the Boston Consulting Group.
• Harry thanks Ali Ralgani for the introduction to Anu.
• Lisa and Zoom are mentioned as sponsors of the show.

"We are back for another week in the world of the 20 minutes VC with me, Harry Stebbings, and I'd love to welcome you behind the scenes here on Instagram at H. Stebbings 1996 with two b's, of course."

This quote is Harry Stebbing's introduction to the episode and an invitation to his Instagram for additional content.

• Anu Hariharan is an electrical engineer with experience in wireless communication.
• She worked at Qualcomm and helped launch 3G in Europe and the US.
• Anu decided to attend business school at Wharton to transition into a product management role.
• At BCG, she led private equity practice and evaluated companies across various industries.
• Anu's interest in tech led her to interview with hedge funds and eventually join Andreessen Horowitz.
• The story of her transition from engineering to VC is shared.

"So that's where I really started my career and spent four to five years at Qualcomm helping launch three G at scale both in Europe and US, and working in their software team."

Anu describes her early career at Qualcomm, highlighting her involvement in the expansion of 3G technology.

• Management team quality and ability to attract senior executives are crucial.
• Building a sustainable business model, paying attention to unit economics, and scalability are important.
• The venture world requires a focus on private funding for scaling.

"And while at BCG, in the PE practice with an engineering mindset, I found that it was really helpful to evaluate companies and figure out what does it take to build a company with a sustainable business model."

Anu discusses her experience at BCG, emphasizing the importance of a sustainable business model for company success.

• Network effects are defined as the increased value of a product or service as more users use it.
• Anu clarifies the common confusion between network effects and technology platforms.
• Incremental value to existing users is the key indicator of network effects.

"Put it simply, the value of a product or a service increases as more users use it."

Anu provides a straightforward definition of network effects, explaining how user growth enhances value for all users.

• There are many types of network effects, with some being more exciting due to scalability and unit economics.
• When analyzing opportunities at YC, Anu looks for certain forms of network effects that indicate potential for growth.

"And if that doesn't exist, then there is no network effect."

Anu emphasizes that without incremental value to existing users, there are no true network effects present.## Direct Network Effects

• Direct network effects refer to the intrinsic virality of a product that causes a network effect.
• The telephone and Facebook are cited as examples of products with direct network effects.
• A network effect only becomes significant when a product reaches a critical mass or scale.
• Companies, especially early-stage startups, often lack any form of network effect initially.
• The potential for a network effect and the team's strategic approach to building it are important considerations.

"So if you look at the telephone, when they first launched, it was useless... And so as a result, more users started adopting the telephone... So that is what I call product virality, which is the product itself spreads because of the organic consequence of its use."

This quote explains that the value of a product like the telephone increases as more people use it, leading to organic growth and a network effect.

"So, in short, I think what we really look at at that stage is, does this company have the potential? So one, through the product, if not, maybe it's a marketplace, but through the product or service offering, do they have the potential to have a network effect?"

The quote emphasizes assessing the potential for a network effect in a company's product or service offering as a key factor for growth and value accumulation.

• Retention is a key sign of network effects, not just rapid growth.
• Facebook's early focus on retention and engagement metrics before expanding to other universities is highlighted.
• The founding team's attentiveness to these metrics is seen as an indication of their understanding of network effects.

"So, very simply, they first launched in Harvard, and there was a lot of craze about the app... That was really smart, because, a, they were trying to figure out what is the true utility of the product."

The quote describes Facebook's strategic approach to understanding and maximizing the product's utility through user engagement, which is indicative of the founding team's comprehension of network effects.

• Defensibility is analyzed through the barriers to entry for competitors and the barriers to exit for users.
• The strength of a product's network effect can be measured by how difficult it is for users to leave the platform.
• Airbnb and Facebook are given as examples of strong defensibility due to their high user exit barriers.
• Uber and Lyft are contrasted as having low exit barriers, affecting the sustainability of their network effects.

"So it's a very simple question, but it has a lot of things tied behind it... So the barrier to exit for the user is a key element."

The quote highlights the significance of the barrier to exit for users as a critical component of a product's network effect defensibility.

• Network effects will continue to be important due to their role in creating winner-take-all markets.
• While network effects are not the only path to scaling a company, they are crucial for certain types of products and services.
• Attention to building a moat around a product can enhance its network effects.

"I think that network effects will always be very important simply because it helps create winner take all markets."

This quote underscores the enduring importance of network effects in establishing dominant market positions.

• Growth teams or programs within a company are considered necessary to maximize the potential of network effects.
• The emergence of growth teams was pioneered by companies like Facebook.
• The speaker suggests that having a dedicated team for growth is likely to become a standard for tech companies.

"Yes. So I think that it's almost inevitable that you need a growth team or some form of growth program within the company to be able to help realize the full potential of network effects."

The quote suggests that growth teams are becoming an essential part of companies to leverage and expand network effects effectively.## Critical Mass and Network Effects

• Critical mass is essential for a product's success, as potential alone is not enough if others can replicate and scale.
• Facebook, despite not being the first social network, focused on growth and critical mass to distinguish itself.
• The company aimed to surpass the common plateau of 50 million monthly active users (MAUs) seen in other apps at the time.
• Facebook's strategy involved extensive research and experimentation to achieve exponential growth from 50 million to 1 billion users.
• Recognizing the need to expand internationally, Facebook understood that targeting local markets effectively was crucial.
• Facebook pioneered the concept of a standalone growth team responsible for running experiments and using a data-centric approach.
• Growth teams became a model for other companies, such as Uber, which later integrated its growth team with its product team.

"So when they hit around 50 million maus, they realized that most apps in that era, around 2007 and eight, had plateaued at 50 million maus."

This quote highlights Facebook's recognition of a common growth plateau and its determination to surpass it, which was a pivotal moment in their growth strategy.

"To become a 500 million user app, you have to expand internationally and different local markets are different."

This quote emphasizes the necessity of international expansion and localization for achieving significant user base growth.

"I think what Facebook did was they pioneered the concept of a standalone growth team that had accountability to run a lot of experiments and use a data centric approach to drive that metric."

The quote explains how Facebook innovated in the realm of growth by establishing a dedicated team with a strong focus on data and experimentation.

• Anu Hariharan stresses the importance of strong retention before forming a growth team, comparing it to fixing a leaky bucket.
• Retention metrics are vital to determine whether a product is compelling enough for users to return.
• Airbnb's early focus on retention involved tracking user behavior, such as site visits and research patterns, despite infrequent bookings.
• Comparing retention metrics with industry peers like TripAdvisor or Booking.com can help gauge the strength of retention.
• The timeline for establishing a growth team varies; companies like Uber may do it sooner due to frequent use, while others like Airbnb may need more time.

"If you don't have strong retention, there is no point in forming a growth team because you have a leaky bucket."

This quote underlines the futility of focusing on growth without first ensuring that existing users remain engaged with the product.

"You have to really break down the metrics that drive the consumer behavior and then figure out what percentage of your users who booked the first time are coming back three months later or six months later and researching on your site."

The quote details the process of analyzing user behavior to understand and measure retention effectively.

• Startups may err by forming a growth team too early when retention is weak, leading to wasted efforts in user acquisition.
• Conversely, waiting too long to form a growth team can also hinder a company's scaling potential.
• CEOs must balance product intuition with data-driven insights, using both to inform decisions.
• A growth team can offer valuable data insights, as seen in Uber's cash transaction experiment in India, which went against their cashless philosophy but proved successful for growth and retention.

"One camp is they have a growth team too early when the retention is really bad or it's not even strong enough."

This quote points out the mistake of prematurely focusing on growth without a solid foundation of user retention.

"The second camp is waiting too long before having a growth team."

The quote identifies the risk of delaying the formation of a growth team, which can impede a company's ability to scale effectively.

• The transition from early-stage to growth phase requires a CEO to shift from "doer in chief" to "company builder in chief."
• This shift is challenging, as many founders may not have experience in various business functions or managing large teams.
• Successful scaling CEOs adapt to focus on team building and solving people problems, moving beyond product-centric roles.

"In phase two, the CEO has to really change the mindset from being the doer in chief to being the company builder in chief."

This quote describes the necessary mindset shift for a CEO when a company moves from the early stage to the growth phase.

"So ceos that I've seen that do it really well, look, no one gets it right the first time and there"

This incomplete quote suggests that even successful CEOs face challenges and learning curves when scaling their companies.## Traits of Successful CEOs

• Successful CEOs are characterized by their active learning and quick problem-solving abilities.
• They invest time to understand what constitutes best-in-class performance before hiring senior executives.
• They prioritize quick course correction upon recognizing mistakes.
• CEOs who excel tend to avoid the pitfalls of delaying senior executive hires and frequently changing their executive teams.

"One, they are active learners, really, really good at... The second thing they do very well is when they figure out a mistake, they course correct quickly."

This quote emphasizes the importance of continuous learning and adaptability among successful CEOs, highlighting two key behaviors: seeking to understand roles deeply before hiring and swiftly correcting mistakes.

• Grit by Angela Duckworth is recommended for understanding the role of perseverance in achieving success.
• The book argues that tenacity is a more critical factor in success than talent or skill, especially in the startup environment.

"My recent favorite book is actually grit by Angela Duckworth... I think truly what distinguishes successful companies from others is the perseverance of."

Anu Hariharan endorses "Grit" as a significant read, attributing the success of companies, including those in startup accelerators like YC, to the perseverance of the founders rather than their innate abilities.

• A balanced board composition is crucial for companies, especially as they prepare for IPO.
• The trend in Silicon Valley has been overly founder-friendly, which may not be ideal as companies remain private longer.
• Boards should include a mix of early-stage VCs and independent directors who can bring corporate governance expertise.

"I think the board composition really needs to adapt from not just having early stage vcs, but having a good composition of independent board directors..."

Anu Hariharan discusses the need for evolving board compositions to include independent directors who can contribute to corporate governance, ensuring that companies are well-prepared for their IPOs.

• Storytelling and clear vision are paramount when raising funds.
• Founders must effectively communicate their company's mission and future goals to attract both investors and top talent.
• Articulating a vision for the future and demonstrating a track record of meeting goals are essential.

"One is storytelling... Two is really having a vision for the future broken down into two year goals."

The quote highlights the importance of storytelling and vision in fundraising, suggesting that these elements are crucial for founders to demonstrate their company's potential and their own leadership capabilities.

• Blockchain technology, including cryptocurrencies like Bitcoin and Ethereum, has the potential for a strong network effect.
• The speculative nature of cryptocurrencies can drive prices and usage, attracting more developers to the technology.

"I do think blockchain has the potential to have a really strong network effect..."

Anu Hariharan shares her view on blockchain technology's potential for creating a network effect, suggesting that the increasing interest from both users and developers could lead to significant growth.

• Ben Thompson's blog is highly recommended for its insightful analogies and analysis across various subjects.
• Thompson's work is valued for its unique comparisons between tech, history, politics, and other industries.

"Well, there are actually a bunch of things I read, but I think my favorite... is Ben Thompson's blog..."

Anu Hariharan expresses her preference for Ben Thompson's blog, praising his ability to draw connections across different fields and provide deep insights.

• Silicon Valley's role in the tech ecosystem is evolving.
• The future may see a triangular tech ecosystem centered around Silicon Valley, Beijing, and Bangalore.
• The dominance of Silicon Valley is likely to be challenged by these emerging tech hubs.

"I do think in the future you will actually see the tech ecosystem be a triangle between Silicon Valley, Beijing and Bangalore."

This quote reflects Anu Hariharan's belief that the global tech landscape is shifting, with Silicon Valley sharing its influence with other major tech centers like Beijing and Bangalore.

• Convoy, a B2B trucking marketplace, was chosen for investment due to the large market opportunity and lack of innovation in the trucking industry.
• The founder's unique blend of logistics experience and engineering skill was a deciding factor in the investment.

"I think the reason primarily invested one, it's a large market opportunity... And then the founder, Dan Lewis, is phenomenal..."

Anu Hariharan explains her decision to invest in Convoy, highlighting the significant market potential and the founder's combination of industry expertise and technical background as key factors.