Information Cascades Lead to Successful Startups
In the tech industry, startups are a huge part of the culture and it is every engineer’s and entrepreneur’s dream to run a successful startup. However, most startups fail: 92% of startups fail within 3 years, many startups are not financially successful, companies have difficulty raising venture funding, and 75% of startups fail to generate a return on investor’s capital. According to the article, there are three key factors that every startup needs to thrive: growth, engagement, and monetization. Growth deals with the initial pitch of the startup and how users view the company, its message, and how they spread information. Increasing public knowledge and popularity of the company revolves around external triggers. These external triggers can be free or costly, such as spreading information by word of mouth or through paid billboard ads. Engagement in the sense of this business model means keeping a user attached to the product and getting them to constantly interact with the app or service provided. For certain services, customer engagement does not have to be frequent but for many recent popular ideas, a lack of engagement can mean the end of a company. Finally, companies need to find a way to generate revenue through their product. Monetization can be achieved through subscription fees, one-time purchases, or cuts taken out of each monetary transaction between customers. Lots of prediction goes into monetization strategies and planning long-term can help the company succeed.
The model to success, according to Nir&Far, revolves around information cascades. Chapter 16 in the Networks textbook focuses solely on information cascades and how they can be predicted and how they influence decision making. Two of the key topics outlined in the article, growth and engagement, are directly related to information cascades. The external trigger of word of mouth is a main principle of information cascades. The spread of information can involve people doing specific research on a topic and acquiring knowledge that way, or people can gain knowledge by hearing about previous people’s experiences, which is more personal. Both methods of information transfer are to be trusted, but generally, word of mouth information is preferred over research. This is clear in the restaurant example talked about both in the textbook and during class: a person hears great reviews about restaurant A but upon arriving, sees that B is more crowded than A. The person eventually ends up eating at restaurant B. So although this person gained knowledge from researching restaurants online, personally seeing people prefer restaurant B over restaurant A is enough to make this person change their mind. The second key to success that relies heavily on information cascades is engagement. Many popular startups and apps today connect people to one another and these companies are only successful because a large range of people use their services. It only takes one person to start using a product, but the success of that product will depend on their initial experience and whether or not they told their friends to use it. If one has more friends using an app, then friends can engage with each other on the app and they will continue to stay active, keeping the company alive.
Startups and new companies rely on the support of people and their most powerful tool in keeping the company alive and spreading information is through word of mouth. Word of mouth can generate information cascades and once a cascade starts, the chance that a company will not fail, all money issues aside, is much higher than it would have been without any sort of cascade.