The Hype Subsidy – Why Early Hype is Dangerous in Consumer Social

For any consumer startup that works, hype — the moment, either organic or manufactured, when the perception of a startup’s significance expands ahead of the startup’s lived reality — is an inevitability. And yet, it’s hard not to view hype with a mix of both awe and fear. Hype applied at the right moment can make a startup, while the wrong moment can doom it.

As tempting and sexy as hype may be, I’m a believer in avoiding it as long as possible. This may seem counterintuitive. If a social network’s network effect is a function of how big the network is, then isn’t hype, which usually comes with a flood of users, a good thing?

To see why that isn’t the case, it’s useful to explore how hype functions similarly to an economic subsidy a marketplace might provide, but with an important difference: unlike economic subsidies, the hype subsidy is not in your control.

First, a primer on flywheels and economic subsidies

In marketplaces with a working network effect, the value to the participants in the marketplace increases as the network grows. You can think of this as a flywheel spinning faster and faster the bigger the network is.

The first step is to get the flywheel spinning. A common technique founders use to do so is to subsidize the transaction.

Economic subsidies are when a marketplace covers part of the cost of a transaction to help a sub-scale marketplace work. In a way, subsidizing a transaction “fakes” how much value the marketplace is able to create for its buyers and sellers by letting the marketplace act as if it had critical mass while in reality it’s still subscale.

When applied well, the subsidy lets a marketplace kickstart transactions and grow faster than it otherwise would because the higher average value per transaction means the value proposition appeals to a larger group of people than the marketplace would have been able to command without the subsidy.

As we saw with the on-demand marketplaces (Uber, DoorDash, Instacart, etc), subsidies can be a valuable weapon to get a flywheel spinning. The beauty of a subsidy is that they can be carefully titrated — if a marketplace has a true network effect, as the flywheel gains momentum, a team can gradually reduce the subsidy over time until the flywheel spins on its own.

The risk with subsidies is that they can be blinding. As they say, it’s easy to grow quickly if you sell $1 for $0.80. Many companies have fooled themselves into thinking that they’ll be able to remove the subsidy once they reach sufficient scale, only to find that the model can’t work without it.

The hype subsidy

Hype creates the aura that something is bigger, more important, and more inevitable than it actually is. In this way, it acts like a subsidy on engagement in a consumer social network.

In the reality distortion field of hype, consumers lean in and invest in a platform with their time and engagement ahead of when they otherwise might have. They pursue status-seeking-work, not because they necessarily get the reward for it relative to other uses of their time, but because they expect to be rewarded for it in the future, either because of the typical rich-get-richer effect of networks, or just in the status of being an early adopter in something that ends up being big. The hype “subsidy” is why subscale startups with significant hype are able to draw celebrities (notoriously difficult to attract given the demands on their time) way ahead of when you’d expect it. Everyone wants to be part of what they perceive to be the new hot thing.

The opportunity and therefore temptation of hype is that it can be a self-fulfilling prophesy. If a product’s value is a function of its network effect, which is itself a function of how many people are in the network, a logical conclusion would be that more users = more value. The challenge however is that while a marketplace has complete control over how much they subsidize a transaction, once hype starts, the hype subsidy is out of a founder’s control. This comes with three critical risks:

“Hype-market fit”

Imagine building a marketplace where a hoard of people outside the company are deciding how much of a subsidy you should provide for transactions every week, and to you, it’s a blackbox. Whether it’s 20% one week and 80% the next, all you know is it’s there, but you don’t know how much.

To say the least, it would be difficult to optimize a marketplace under these conditions. People are using your marketplace for a broader set of use cases than you had anticipated, but would they happen without the subsidy? People are referring their friends, but would that happen without the subsidy? etc.

This is what building in the midst of hype is like. Everything works better (and differently) than it would without the hype subsidy.

Communities are living organisms with a brief window to guide their evolution. This is especially true when you are creating a new format. In a time when that organism requires constant tweaking and vigilance, any distortion in understanding how it is evolving can be lethal. In this way, hype applied too early in a network’s evolution can doom it because it makes it extraordinarily difficult in the beginning to know how consumers will engage once the hype subsidy is removed. You risk optimizing for the wrong things.

Hitting the hype air pocket

There is a cliché in startups that building a startup is like building the plane after it’s taken off. This is most true in viral consumer networks, and it is MOST MOST true in consumer networks going through a hype cycle.

When a flood of new users sign-up for a product, all the cracks become obvious. Live experiences like Houseparty, while brilliant, had a fundamental flaw in their reliance on push notifications. As users added more friends to their network, the push notifications (a critical part of their engagement model), got too noisy and rather than gain momentum, the flywheel mechanics broke down. People started to ignore the notifications, or unsubscribe all together. Hype forced this reality fast, giving little time to tweak the model.

If a product’s flywheel has any weak parts to it which stop it from spinning faster, the actual average experience on the network can’t catch up to the hype fast enough, and when the hype subsidy drops to 0%, the network hits an air pocket. Users go from being drunk with hype, to having a hangover.

This can become a tailspin. The perceived or expected experience drops below the actual experience, as if the company had a tax instead of a subsidy. The people who got pulled forward by hype leave. It becomes uncool, people become skeptical, new users have to be convinced to give it a try despite this perception. It’s possible to build the network back up, but it’s a lot harder. It’s easier to teach users something new, than to overwrite something they already think.

This is why I’m an advocate for avoiding hype as much as you can until you feel like you’ve got a product and flywheel that is really working. Only then do you try to stoke hype because only then can your flywheel take advantage of the turbo-boost. When hype hit Snapchat, the product and growth loops had been maturing for months without any distortion from hype. Snap was ready for it and could take advantage of the influx of new users to spin the flywheel faster. When hype hit Color, the product was embryonic and the air pocket came fast.

Catalyzing competition.

The last risk worth noting which we’ve seen play out with Clubhouse, is that hype catalyzes incumbents to react to you vs be surprised by you. Would Twitter have moved as quickly and aggressively with Twitter Spaces were it not for the perceived inevitability (and therefore existential threat) of Clubhouse?

It’s why I love companies to be underestimated from the outside in the early days. From the outside, Pinterest seemed niche. From the outside, Robinhood seemed niche. From the outside, Etsy seemed niche. Heck, from the outside in the early days, even Facebook seemed like it was going after a college-limited niche. Being underestimated gives you a lot more time to figure things out, and by the time the incumbents see what’s coming, it’s too late.

My hype advice: Avoid Avoid Avoid… GRAB!

Is hype ever good? Absolutely. Hype is powerful in getting in-demand consumers to lean in and invest their time in a platform, and thus catalyze hypergrowth. It’s also of course fantastic for hiring. Nonetheless, I’m a big advocate for shunning the siren of hype as much as you can until you are confident your product and loops are ready. When your product is ready, your flywheel can spin faster as new users sign-up, and you can retain those users.

In summary, like subsidies, hype can be an effective weapon. But unlike economic subsidies, hype is better used after you get to product-market fit, not before. If your product is ready for it and your flywheel is spinning, it can turbocharge that flywheel. If on the other hand, you are newly launched or creating a new format that still requires constant tweaking and vigilance, it can be lethal. Users hit the hype air pocket faster than the network can support it. Stoking hype too early in a startup’s lifecycle might look and feel good in the short term, but dooms it for, at worst, failure and at best a lucky acquisition or a long painful road to rebuilding.

native new yorker, SF-resident. general partner @benchmark. formerly product @Pinterest. originally blogging at www.adventurista.com.