Viral Loop, the Power of Pass-it-on By Adam L Penenberg
Sceptre/Hodder & Stoughton, 2009
Reviewed by Georgy S Thomas
The word viral has its origins in medicine. But there’s some divergence between how it’s understood in the physical world and in the virtual world. Most people do not spread viruses intentionally in real life. But online, while there are harmful viruses designed to make users unintentionally spread them, users also enthusiastically spread the word about sites they dig, a process referred to as going viral.
When a company grows because each new user begets more users, it’s said to be powered by the ‘‘viral expansion loop’’. Viral business models are not entirely foreign to the physical world. Amway and Tupperware are classic examples of companies which have virality imprinted in their DNAs. ‘‘Virality is, however, better suited to the frictionless environment of the internet, where enough clicks can project a message to millions of people.’’ Adam L Penenberg notes that during the past 15 years, a few of the world’s marqué companies ‘‘started from scratch and then rode a viral loop’’ to unprecedented success. Through this book, the former Forbes journalist and professor of Journalism at New York University, is attempting to tell us how they did it.
But first, a listing of the shared characteristics of viral expansion loop businesses:
▪ Web-based: The internet is their natural turf.
▪ Free: Users consume the product for free, at least initially.
▪ Organizational technology: Only users create content. The promoters merely provide the tools to organize it.
▪ Simple concept: Easy to use.
▪ Built-in vitality: Users spread word purely out of their own self-interest.
▪ Extremely fast adoption: Often without spending a dime for marketing.
▪ Exponential growth: The scaling up happens in a matter of weeks, if not days.
▪ Predictable growth rates: If there are the right viral hooks, growth can even be mapped out in advance.
▪ Network effects: Users find it more useful when more join.
▪ Point of non-displacement: There’s comes a time when it’s nearly impossible for it to be taken down by a rival.
▪ Ultimate saturation: After acquiring substantial heft, growth finally slows down.
The Centrality of Viral Co-efficient
Early on, Penenberg advances the concept of the viral co-efficient, which is central to understanding the pace of growth for viral businesses. Viral co-efficient is simply the number of additional members each person brings in. If the co-efficient is less than 1, the business cannot scale. If it’s 1, (i.e. if a new member brings in just one additional member) ‘‘the start-up will grow, but at a linear rate, eventually topping out’’. Above 1, it achieves exponential growth.
Let’s come to grips with the table and line graph taken from the book by quoting Penenberg:
‘‘The table, created by Jeremy Liew, a venture capitalist with Lightspeed Venture Partners, an investor in RockYou, illustrates the difference a tiny increase in the viral coefficient can make, showing relative growth rates based on a viral coefficient of 0.6, 0.9, and 1.2. Liew started with a base of ten members and defined time as the period it takes for a member to invite others, which he estimated could be anywhere from two and eight weeks. Starting with 10 members and a viral coefficient of 0.6, you flatten out at 25 people, a gain of 15 users. At 0.9, you end up with 75 new members and growth slows dramatically. With a viral co-efficient of 1.2, however, those same 10 people yield 1,271 additional users. Expressed in a line graph (given below the table), a viral coefficient of 1.2 takes on the form of an exponential curve.’’
The Three Types of Viral Expansion Loops
Penenberg identifies three categories of viral expansion loops: viral loops, viral networks and double viral loops. A simple viral loop would be akin to the link placed by Hotmail in the body of every message, offering recipients the ability to set up personal webmail accounts. ‘‘…Within 30 months Hotmail went from zero to 30 million members,’’ Penenberg notes. In viral networks, he includes eBay, Facebook, MySpace, Twitter and LinkedIn, where ‘‘scale and power really snowball’’. Double viral loop is considered a hybrid. The example he gives is of social networking site Ning, ‘‘where a member of one social network will often set up another social network on a different topic’’. There’s yet another category, stackable viral businesses, which doesn’t fit into any of the three models mentioned above. In the stackable world, one viral business is overlaid on top of another. Penenberg mentions PayPal, which tagged on to eBay until the latter acquired it, as well as YouTube, which was riding piggyback on MySpace until Google scooped it up.
Each of these categories is fleshed out by devoting chapter-length case studies of one or more representative companies. Penenberg is less of an insightful analyst than a good, old fashioned storyteller. So do not approach his book as a source for the distilled wisdom or formula on setting up and succeeding with viral expansion loops. It’s not a how-to manual. After painting a picture with broad strokes about the nature of the beast, he starts narrating the stories of the pioneers who broke new ground in the niche so that readers can gather their own insights on what works and what wouldn’t.
An Indian Stares Down Gates’ Stiff Suits
For Hotmail’s Sabeer Bhatia, learning to haggle in the bazaars of Bangalore (just where, I wonder… KR Market? Or Russel Market? Can’t visualize the son of an army officer, and a bright student to boot, doing that) while growing up stood him in good stead when jousting with venture fund DFJ during the start-up valuation, as well as holding his ground while negotiating alone with the stiff suits of Microsoft. What began with an initial offer of $160 million from Gate’s company soon developed into a game of chicken with investors and employees beginning to worry whether Bhatia would lose it all by going overboard. In the end, Bhatia folded up Hotmail for $400 million worth of stock, leading to a full-scale eruption in Silicon Valley over ‘Sabeer who?’
Penenberg probably did his interviews of Bhatia, co-founder Jack Smith, and DFJ partners Tim Draper and Steve Jurvetson in 2008, years after the epic saga of Hotmail’s creation had been milked dry of whatever it was worth by a galaxy of reporters. Still, he succeeds in wringing out hitherto unheard of nuggets from the four participants. For instance, he notes how Bhatia extracted a price from Jurvetson for his cardinal sin of revealing his sore ego over losing Yahoo to Sequoia. The Hotmail co-founder soon dangled the threat of a Sequoia pitch to push back on DFJ’s demand for a 30% pie for $300,000 worth of seed money. In the end they settled for 15%. Penenberg draws a more empathic portrait of Bhatia than either Jessica Livingston (Founders at Work, 2007) or even Po Bronson in his celebrated December 1998 Wired magazine profile of Bhatia. In her book, Ms Livingstone comes across as downright rude when she asks Bhatia: ‘‘You arrived in this country with only $250 in your pocket. Wasn’t it tempting for you to agree to sell for, say $300 million?’’ The question portrays a penurious third world immigrant acting above his station, conveying little about the Indian regulatory restrictions of that era which prevented travelers from taking out less than $250 from the country.
On the question of inserting the tagline in the body of each text message from Hotmail __ a feature which played a major role in Hotmail’s viral growth __, Ms Livingstone extracts the worst from Bhatia, who after claiming the original idea for Jack Smith, goes on to denounce Tim Draper for trying to usurp credit for both the tagline as well as persuading the Hotmail duo to do webmail, instead of JavaSoft. In her blog to promote the book, she has charged Bhatia with lying to her, which is unusual for an author.
Reading Penenberg, one wouldn’t learn of any rancor. Instead, we learn of Jurvetson’s view that Bhatia was a masterful negotiator. And the provenance of the tagline? Penenberg makes a good case for it being Draper’s baby, since he sketches its evolution in detail, including snatches from their conversations. We are told that Draper initially wanted it to be ‘P.S. I love you. Get your free email at HoTMaiL’. When it actually appeared, the ‘P.S. I love you’ part was lopped off. But still Hotmail went viral. And we know the rest.
And Thus the Web was Made
Marc Andreessen gets to tell his story twice. We first learn about the pioneering role he played in throwing the internet open to the non-geek world by creating, along with Eric Bina, the Mosaic browser. To drive home the point, Penenberg elevates him to the pantheon of the three men who made possible the World Wide Web as we know it today: ‘‘Paul Baran of the Rand Corporation, who conceived the internet; Time Berners-Lee, creator of the World Wide Web; and Marc Andreessen, who figured out how to navigate it.’’
I’m yet to find a coherent explanation for the heretical replacement of Vinton Cerf’s name with that of Paul Baran, but let’s return to Andreessen and see how history was created.
To quote Penenberg:
On the morning of January 23, 1993, he posted a message to several online bulletin boards, which read, in part:
By the power vested in me by nobody in particular, alpha/beta version of 0.5 of NCSA’s Motif-based information systems and World Wide Web browser, X Mosaic, is hereby released.
The first part of this story ends in grief. NSCA (National Center for Supercomputing Applications) Director Larry Smarr received the lion’s share of the credit for Mosaic, and we find a dejected Andreessen skipping town and relocating to Silicon Valley, hoping he had never studied Computer Science. Elsewhere in the Bay Area, another digital pioneer was licking his wounds, after having been more or less forced out of the company he founded, even as VCs feasted on its billions in market value. On his last day at Silicon Graphics, Jim Clark typed out the now famous email to Andreessen:
You may not know me, but I’m the founder and former chairman of Silicon Graphics. As you may have read in the press lately, I’m leaving SGI. I plan to form a new company. I would like to discuss the possibility of you joining me.
The familiar tale of their joint creation of the Mosaic-killer Netscape Navigator, the epoch-setting IPO of the viral company which kicked off the dotcom boom, and the duo’s downloading of Netscape to AOL to walk away with billions, even as the countdown for its flameout had begun, are narrated in detail. Perhaps, to make amends for any lingering doubts on whether Netscape’s rapid decline took some sheen off Andreessen’s achievements, Penenberg gives him another shot at remaking his legacy through the chapter on Ning. That narrative is used as a point of departure to list out the characteristics of viral loop businesses and the innovations which made them possible, viz., display screens, powerful and smarter microprocessors, and ubiquitous connectivity.
Like the rerun of a bad movie, AOL gets another crack at notoriety between the pages of Viral Loop when we learn of how the internet portal ran social networking site Bebo to the ground, after acquiring it for a whopping $850 million. Just as Clark and Andreessen before them, walking away with millions from the deal ($595 million to be exact) was the husband and wife team of Michael and Xochi Birch who had built Bebo from the ground up frugally, parlaying the lessons learned from their first three failed start-ups. The event did not occur in the distant past, but in 2008, and the deal was valued much more than the celebrated 2005 MySpace purchase by News Corp for $580 million.
Although not reaching the stratospheric levels of AOL, Reid Hoffman gets stuck with a question mark for being hustled into bidding $700,000 in a blind auction for a social networking patent of questionable merit. Mind you, Hoffman had played a leading role in the successful evolution of PayPal, reinforcing his reputation for smart bets by later founding business-oriented social networking site LinkedIn.
The book is filled with trivia. For instance, do you know the identity of the biggest buyer at WabiSabiLabi, the Swiss auction site for black market hacker code? It’s the United States government, on a mission to stockpile munitions in the event of a cyber war. And what about the bronze sculpture in Sabeer Bhatia’s likeness promised by VC Doug Carlisle of Menlo Ventures for breaking the $200-million barrier with Microsoft? It never got made, because Bhatia’s mother told her son it was bad luck to have one modeled on a living person. Have you heard that the company behind eBay was initially known as AuctionWeb? Or that PayPal evolved shedding the skin off Fieldlink and Confinity? If you haven’t, you should know by now. The PayPal story gets a larger canvas from Penenberg, and while on it, we learn that the first commercial implementation of the captcha came into being because co-founder Max Levchin and colleague David Gausebeck devised a test to block the creation of fake accounts.
The Less Clicks, the Better it is
Penenberg has seeded Viral Loop with insights gained from successful as well as failed entrepreneurs about what works and doesn’t work in the social networking space.
For instance, fewer registration steps mean higher conversion rates. Bland colours work better than garish backgrounds, and speeding up the service so that pages download faster also helps. According to Greg Tseng of CrushLink, adding a smiley emoticon in email subject boxes raised their viral co-efficient a full 10%! Michael Birch found that people were turned off by anything that required them to think. Thus it pays to simplify instructions. So does providing for a cut-and-paste function. Birch also found that allowing users to tinker with a page’s html is a big mistake. And lifting restrictions on uploading photos is a big turn on.
The Fine Art of Scaling Up
Scaling up in the right way is one of the central challenges of viral loop businesses, and Penenberg devotes considerable space to addressing the issue. ‘‘To design and build a system that can scale to multiple orders of magnitude is no trivial engineering accomplishment.’’ It’s the classic chicken-and-egg dilemma. On the one hand, it doesn’t make sense to plan for massively scaling unless you are indeed massively scaling. But on the other, if you don’t scale in time, it could be a recipe for disaster. Take eBay for example. In 1999, after a series of smaller outages, the site went down on June 10 for a full twenty-two hours, calling the company’s very survival into question. To take the scale challenge head on, eBay CEO Meg Whitman had to search far and wide to locate someone with the engineering chops to design a turnaround. Penenberg has given a detailed picture of the long and narrow road traversed by Maynard Webb in his quest to take eBay into the rarefied world of 99% uptime, in the process giving us invaluable insights into the processes involved.
Viral Loop is a valuable addition to the arsenal of a thinking techie.
The author is a Bangalore-based tech entrepreneur.
Email: [email protected]