Simply by designing your product the right way, you can build an insanely fast-growing business from scratch. No advertising or marketing budget, no need for a sales force, and venture capitalists will flock to throw money at you.
Many of the most successful Web 2.0 companies, including MySpace, YouTube, eBay, Flickr and rising stars like Twitter are prime examples of a "viral loop"—to use it, you have to spread it. The result: Never before has there been the potential to create wealth this fast, on this scale, and starting with so little.
In Viral Loop, Penenberg tells the fascinating story of the entrepreneurs who first harnessed the unprecedented potential of viral loops to create the successful online businesses—some worth billions of dollars—that we have all grown to rely on. The trick is that they created something people really want, so much so that their customers happily spread the word about their product for them.
One such business was Hotmail. After their 20th venture capitalist meeting, Sabeer Bhatia and Jack Smith, former hardware engineers at Apple who first came up with the idea for webmail, finally raised seed money from famed VC firm, Draper Fisher Jurvetson.
PS: I Love You. Get Your Free Email at Hotmail
After the two sides worked out terms governing the initial $300,000 seed investment, Sabeer Bhatia and Jack Smith walked out of the Draper Fisher Jurvetson offices with a $50,000 bridge check and quit their day jobs. Working from home, Smith, after bringing onboard another engineer, got down to building a prototype. They also needed to come up with a name, which fell to Smith, who stayed up late with his wife to brainstorm. Sitting with a blank sheet of paper they listed possibilities that contained "mail" in some form. Out of two-dozen there was Cool Mail, Run Mail, this mail, that mail, but no "A-ha!" moment. Finally his wife suggested, "Hotmail."
Smith wrote it down. He wasn't sure about the "hot" part, but given everything else this seemed the best candidate. Then he noticed it contained the letters "HTML," the acronym for "HyperText Markup Language," the lingua franca of web pages. Smith canvassed Bhatia the next day while riding in an elevator to their attorney's office. As usual, his friend initially gave it a cool reception but they were running out of time so he went along with it. On March 27, 1996 Smith registered the Hotmail domain.
At the same time he finished a prototype within two weeks, sharing it with a small circle of friends who provided valuable feedback, mostly relating to layout, how e-mail should be viewed and the index page arranged, the look and feel of the interface, how the columns should appear on the screen. Smith demonstrated it at the next meeting with Draper and Jurvetson, who were duly impressed.
Draper asked, "How are you going to get the word out there?"
"We'll put it up on billboards," Bhatia said. He also mentioned radio advertising.
"God," Draper replied, " that's expensive marketing and we're giving this away?" He thought for a moment. "Can't you just give it out to all those guys on the web?"
That would be spamming, Smith replied.
I guess spamming is bad, Draper thought. He hadn't heard the term before. Then he flashed back to Harvard Business School, where he had received his MBA—a case study his professor had covered in class: women holding parties for their friends then selling to each other. A certain percentage of the women at each party became salespeople by referring more business. Tupperware, that was it. He also recalled MCI's "Friends & Family Plan," which harnessed the power of social interactions to spread the product. He wondered if they could do something like that with webmail.
"Jack," Draper asked, "could you put a message at the bottom of everybody's screen."
"Oh come on, we don't want to do that!" Bhatia blurted out.
"But can you technically do it?" Draper asked.
"Of course we can technically do it," Smith said.
"Oh, great," Draper said. "And it can persist, right? You can put it on one message and if he sends an email to somebody else you can put it on that one, too, right?"
"Yeah, yeah," Smith said, not convinced.
"So put 'PS: I love you. Get your free e-mail at Hotmail' at the bottom."
Bhatia and Smith communicated through pained expressions. "Oh, no," they seemed to be saying. Draper had seen that look before. Of all the investors in the world, why did we end up with this idiot? Frankly, he didn't care what they thought. This just felt right.
"Wait a second guys, don't you get it?" Draper asked. A tag line at the bottom of each message would act as free advertising. "I can send you an e-mail and you can send it to all your friends and they get it and they can sign up and send it to their friends and pretty soon it takes off."
Smith said, "I don't think…"
Bhatia interrupted. "Let's move on to other business."
Draper agreed to table the discussion for now, but had no intention of letting it go. He vowed he would keep pounding until they listened.
They launched HoTMaiL on Independence Day 1996. Not only did they like the symbolism—they viewed webmail as a populist tool because any user could log in from anywhere in the world—Smith had long promised the service would be ready by then. After turning on the registration function and hitting the switch in the early afternoon, Smith accompanied his tiny technical staff to Chili's Grill & Bar in San Jose to celebrate. To keep track of signups he brought along a laptop with an attached radio modem receiver on the back, the antennae sticking up like a divining rod. Over quesadillas Smith counted 100 registrations in the first hour. After lunch they went to the movies, and by the time the summer blockbuster "Independence Day" began to roll he tallied 200 signups. Upon exiting the cinema, Smith logged in again to find that fifty more joined HoTMaiL. They were finding the site via word of mouth and word of mouse. People were talking about it, and letting their friends and family in on the deal via email, using the Hotmail message as a proof of concept: Eighty-percent of those who signed up said that they learned about it from a friend.
Growth was robust but not staggering for the week. At the next meeting at DFJ Tim Draper once again pushed the two young entrepreneurs to insert a tagline into each message. Bhatia and Smith were adamant about not adulterating email. It just wasn't done. They would feel like they were polluting emails with advertising, and what about privacy issues? If someone is adding a tagline what else were they doing? A user would wonder what else they had access to and they were also fairly certain it was unethical. But Draper wouldn't let it go. The benefits, he contended, far outweighed the risks. If they were predicating their entire business on the size of their user base, they should be doing everything in their power to increase it as fast as possible. "P.S. I love you. Get your free email at HoTMaiL." The more he said it, the more he liked it.
The next day Bhatia phoned Draper with the news that they agreed to do it, but without the "P.S. I Love You" part. The impact was almost instantaneous. Within hours Hotmail's growth took on the shape of a classic hockey stick curve. They started averaging 3,000 users a day, compounded daily. By Labor Day they registered 750,000 users and within six months they were up to 1 million. Five weeks after that they hit the 2 million user mark, adding more than 20,000 signups a day, with Smith desperately trying to keep the servers up and running. At times, the site became sluggish and suffered major outages. But through it all Smith, using little more than virtual spit and glue, kept Hotmail—they had dropped the awkward capitalization by this point—afloat.
The tagline with the clickable URL that Draper insisted that Bhatia and Smith insert into every outbound message served as a promotional pitch for the company. Simply by using the product every customer became an involuntary salesperson. This implied endorsement from a friend or peer made it more powerful—and more far-reaching—than traditional advertising. The receiver of a Hotmail messages could see a.) his friend is a user, b.) it works, and c.) it's free. Successful consumer branding is often based on user affiliation. (The cool kids wear low cut jeans, so I will, too.) This plays to our tribal instinct. It also resulted in clusters of users. Bhatia sent a message to a friend in India and within 3 weeks Hotmail registered 100,000 users there. It also became the largest email provider in Sweden without spending a nickel on advertising there. In contrast, Juno blew through $20 million in marketing and advertising yet Hotmail gained three times as many users in half the time.
As Jurvetson related in what would become a famous white paper, the Hotmail adoption pattern was similar to that of a virus "with spatial and network locality." A person's email address book is a type of virtual social network that is not encumbered by geography. A certain percentage of contacts will be friends, family and colleagues who reside relatively near by; others may be scattered throughout the world. A Hotmail message sent across the country might result in a new cluster of users. Jurvetson noted a "mathematical elegance" to Hotmail's "smooth exponential growth curves" in the company's early days: cumulative users = (1+fan out) cycles. "We would notice the first user from a university town or from India, and then the number of subscribers from that region would rapidly proliferate," he wrote. "From an epidemiological perspective, it was if Zeus sneezed over the planet."
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