Viral Loop

by ADAM L PENENBERG

  There were the inevitable copycats: Bangable—which needs no description—RateMyFace.com, and a number of parodies, including a site that ranked monkeys. None, however, could rival Hot or Not’s popularity. There was something ingeniously simple and intuitive about Hong and Young’s formula that others couldn’t replicate. The site grew so big so fast, and continued to attract visitors at an exponential rate, that it had achieved a point of nondisplacement. No one could knock them off their pedestal.

  Besides money and fame, the site offered fringe benefits. It vastly improved their dating lives, for one. Now Hong could afford a Porsche and a posh condo and dated women way out of his league. The site also added to his encyclopedic knowledge of American pop culture. At times he felt like an amateur sociologist. Initially his photo rated a 3.8, once plummeting to 2.6 after a particularly unfortunate haircut, while Young averaged 3.5. That changed after they inserted a “Meet the guys that run Hot or Not” link on the home page and their scores rose. It figured, Hong thought. The more successful the site, the more money they made, the more famous they became, the hotter they got.

  When Hong dug into the logs, he learned that two-thirds of visitors to the site were men and only two out of a hundred bothered to post a photo. Most logged on from work and stayed for an average of forty-five minutes a session. The largest demographic segment was eighteen- to twenty-four-year-olds, followed by twenty-four- to thirty-year-olds, and 15 percent were under eighteen. Most men voted strictly for the ladies. So did women. (Hong found that surprising, although virtually every woman he spoke to said it made perfect sense.) A guy holding a puppy scored higher than one who didn’t. A bikini-clad female almost always scored a 9. The best-looking, as voted by their audience, hailed from warm-weather states, with women from Florida, California, and Hawaii populating the site’s top 10 lists, probably because they were more comfortable baring skin than their cold-weather counterparts.

  It took a while for Hong and Young to realize that they had a viable business, even after Lycos offered $2 million (they turned it down flat) and venture capitalists expressed interest. There was nothing inherently viral about Hot or Not. It was simply compelling enough to induce people to spread the word. Like any fad, Hong believed it would lose steam and their gravy train would run out of track. Young could then return to grad school to complete his dissertation, “Design and Specification of Heterogeneous Systems,” and Hong would move on to other ventures, both richer and wiser. But in their first full year, they pulled in $600,000 in almost pure profit, and their revenue doubled each and every year that followed. By 2004, the site generated more than $4 million annually, which the two partners split in the form of dividends. In July 2006, the site tallied its 13 billionth vote and was the third most popular dating site on the Internet.

  Two years later Hong and Young sold Hot or Not for $20 million.

  Introduction

  Viral President

  Positive Feedback Loop, Spreadable Concepts, and the Three Categories of Viral Expansion Loops

  As James Hong and Jim Young demonstrated, it’s possible to build a multimillion- or even billion-dollar business from scratch, simply by designing a product the right way. No advertising or marketing budget, no need for a sales force, and venture capitalists will kill for the chance to throw money at you.

  This may sound too good to be true, like some dodgy get-rich-quick scheme from a late-night cable TV infomercial or the latest spam come-on to hit your in-box, but some of the most iconic Web 2.0 companies—Hotmail, eBay, PayPal, MySpace, YouTube, Facebook, relative newcomers like Digg, LinkedIn, Twitter, and Flickr, as well as hundreds of widget makers navigating the emerging “social media” economy—fit this description. The trick is they created something people really want, so much so that their customers happily spread their product for them through their own social networks of friends, family, colleagues, and peers. That’s one of the beautiful things about Web 2.0: you can nurture a business like never before and achieve almost cosmic valuations in record time.

  These companies are powered by something called a “viral expansion loop,” which is accomplished by incorporating virality into the functionality of a product. In plain English, it means a company grows because each new user begets more users. Just by using a product they spread it. After all, what’s the sense of being on Facebook if none of your friends are, or using Flickr if you can’t share your photos? Why post an item for sale on eBay if no one is around to bid on it, or use PayPal if no one accepts it? It’s not quite enough to click through a cache of photos on Hot or Not and vote on people’s relative attractiveness unless you can share the experience—and that’s precisely what happened.

  Within ninety minutes of Hong and Young’s brainchild hitting the Web, the number of users doubled every two hours. On day two, they doubled every hour, breaking one hundred thousand users. For every ten visitors, two or three were—without prompting—passing the link to others, with the pattern replicating itself en masse. That’s because in large numbers, human behavior is largely predictable. We seek to pass on interesting or funny memes or products to our personal social networks, whether they are included in our email address books, part of our collection of friends on Facebook, visitors to our blog, followers on Twitter, or participants on discussion threads.

  Viral-loop businesses seek to take advantage of this trait.

  [ POSITIVE-FEEDBACK LOOP ]

  While a negative-feedback loop can create a vicious circle and drive investors to dump stocks, further pushing down the market, leading to more bad news and inducing others to sell, and so on, a viral expansion loop is the opposite, a type of positive-feedback loop, a virtuous circle. The result is a type of alchemy that, done right, leads to a self-replicating, Borg-like growth. Put another way, a viral expansion loop is like compounding interest on a bank account: one user becomes two, then four, eight, to a million and more. Not unlike taking a penny and doubling it every day for a month: by the end of a week you’d have 64 cents; within two weeks, you have $83.92; by day thirty, about $5.4 million. Viral loops have emerged as perhaps the most significant business accelerants to hit Silicon Valley since the search engine.

  Venture funds have been gravitating to companies with viral loops baked into their business models, inspired, no doubt, by the success of Peter Thiel, whose $500,000 investment in Facebook is worth, depending on how you value the company, anywhere between $300 million to $750 million (on paper, at least). Sequoia Capital’s Roelof Botha, an early YouTube backer, has also placed his bets on viral loops. Social-network creator Ning raised $104 million in venture capital while widget maker Slide, which creates photo slideshow tools, attracted $50 million from Fidelity Investments and T. Rowe Price, giving it a $500 million valuation. Fred Wilson, managing partner at Union Square Ventures, joked that he’s considered changing his firm’s name to Viral Ventures, since almost two-thirds of the $20 million his firm invests annually goes to viral-loop companies such as Twitter, the microblogging outfit.

  Although the word “viral” has been co-opted from epidemiology to explain how things spread from user to user over the Internet, there is a stark difference between virality online and what is found in nature. Most people do not spread viruses intentionally—it is a natural by-product of being human. Over the Web, however, users enthusiastically disseminate ideas, information, opinions, links to blogs, photos, videos, and Web services. (The exception is when a user downloads a computer virus; as in the real world, nobody wants to spread that.) It’s perhaps surprising that something so profound, powerful, and potentially profitable as a viral loop has remained under the radar for so long. Entrepreneur Andrew Chen, a former advertising executive who worked with MySpace, hi5, and other social sites, has a simple explanation: this critical insight “is worth a lot of money,” and the few people who understand it “are all doing their own companies.”

  Chen views viral loops as “the most advanced direct-marketing strategy being developed in the world right n
ow.” And make no mistake: viral expansion loops are about marketing, just not in the traditional sense. “Nothing can be truly viral unless it is good,” venture capitalist Wilson says. “You can create a crappy application, build viral hooks in it, but if it’s bad nobody will follow the viral channel and the company will go out of business.” But if you make something people really want, your customers will make your business grow for you. Just by using a product users are, in essence, offering a testimonial.

  Viral business models are not entirely new. Tupperware, for example, where each party attendee is a potential salesperson, has elements of virality etched into its marketing formula. So does Amway’s multilevel marketing strategy to sell personal-care products, jewelry, and household goods. MCI’s Friends and Family campaign from the early 1990s offered customers inducements to spread the product. And what are chain letters and pyramid schemes but a permutation on viral loops with irritating (and often nefarious) intent?

  Virality is, however, better suited to the frictionless environment of the Internet, where enough clicks can project a message to millions of people.

  [ VIRAL PRESIDENT ]

  Viral strategies aren’t strictly for businesses. They are also seeping into other arenas—like politics. And no one was more successful in imprinting a viral loop into a campaign than Barack Obama. “One of my fundamental beliefs from my days as a community organizer is that real change comes from the bottom up,” Obama said in a statement. “And there’s no more powerful tool for grassroots organizing than the Internet.” Because an organization can reach only so many people, it must turn to loyal followers to widen the pool. As with all things viral, connecting to others outside the initial cluster of supporters depends on the quality of referrals. Friends, family, and colleagues are far more credible than any advertisement a marketer could dream up. This was what drove the campaign’s online strategy. The Web was especially helpful in organizing supporters in caucus states like Iowa, which gave Obama his first big victory. And this approach was arguably the difference between beating Hillary Clinton, the heavy favorite, in the primaries and coming in second.

  A pivotal moment came when the campaign hired Chris Hughes, a twenty-four-year-old founder of Facebook. With the informal title “online organizing guru,” Hughes retrofitted grassroots campaigning to Web 2.0 by weaving together social networks and the mobile Internet into a central platform of Obama’s presidential campaign. The linchpin was My .BarackObama (MyBo, for short), which functioned as a lively online community and social network, registering 1.5 million volunteers. There users created profiles, complete with personal descriptions, friend lists, and blogs; joined one of the twenty-seven thousand groups that formed; raised money and organized meetings and get-togethers—all through a Facebook-like interface. The site had a search function, enabling like-minded people to find each other; a page offering tools to create a personal fundraising page (“You set your own goal, you do the outreach, and you get the credit for the results”); a blog; and a forum that drove even more traffic to the site.

  Leading up to the election, MyBo members organized more than two hundred thousand campaign events. This didn’t just energize Obama’s base of support; it generated loads of cash. Over the span of two years, the campaign brought in $750 million from 4 million donors; nine out of ten donations were for less than $100—and half were for $25 or less. The campaign achieved this by democratizing its fundraising. Instead of turning to wealthy Americans, who could be seen as leveraging their privilege into power, Obama’s campaign tapped the little guy, spreading donations across millions of Americans—giving each donor a stake in his campaign’s success. It accomplished this largely without fundraisers, which until the advent of Obama’s viral money machine, were viewed as unsavory necessities for any candidate running for office. But not only do such fundraisers sap the candidate’s time, which could be better spent campaigning and making a case for being elected, they give the appearance that rich, influential donors expect political favors in return for cold, hard cash.

  In February 2008, Obama’s campaign raised $55 million online without its candidate attending a single fundraiser. What’s more, while the law allowed large donors to contribute $2,300 for the 2008 primaries and the same for the general election, smaller donors were tapped repeatedly, forging ongoing connections with the candidate. “Since most have not donated anything like the maximum amount, [Obama] doesn’t just have a list of names to thank; he has a huge list of names to ask for more,” political blogger Andrew Sullivan pointed out. In one sense, the smaller the donations, the more the campaign was able to invest in its supporters, who could be counted on to raise money, knock on doors, and spread campaign memes.

  [ SPREADABLE CONCEPTS ]

  Here, in broad brushstrokes, are the viral strategies the campaign embraced:

  1. A short, clear positioning statement: Unlike Hillary Clinton touting her “experience” or John McCain bragging that “I have the record and the scars to prove it,” Obama’s two core messages were “Change” and “Yes, we can.” A call to arms, these taglines offered supporters a clear rallying cry, while Clinton’s and McCain’s messages were more nebulous and top-down (that is, elect me because I’m more experienced). Obama’s campaign galvanized its supporters, who in turn virally extended his message.

  2. Multiplier effects: During the campaign, Will.i.am, frontman for the Black Eyed Peas, created a musical mash-up based on Obama’s phrase “Yes, we can” that included celebrities like Scarlett Johansson and Kareem Abdul-Jabbar. After the rapper uploaded it to YouTube, its virality didn’t go unnoticed. The campaign quickly embedded a link to the clip on its website. “After nearly a year on the campaign trail, I’ve seen a lot of things that have touched me deeply, but I had to share this with you,” Michelle Obama wrote in an email to supporters. “Sharing this video, which was created by supporters, is one more way to help start a conversation with your friends, family, co-workers, and anyone else who will be voting soon about the issues important to them in this election.” In the end, the video was viewed 20 million times. Another music video—“I Got a Crush…on Obama,” by a woman who called herself Obama Girl—was downloaded more than 13 million times, while comedian Sarah Silverman produced one that took a humorous look at convincing seniors in Florida to vote for Obama. Promoting the creativity of its supporters helped the campaign extend its message.

  3. The long tail: If Obama had asked for $100 million in the weeks leading up to the election, he probably wouldn’t have gotten it. Instead he told people to donate whatever they could—a few bucks even—and then he was able to return to them over and over. In other words, small is the new big. Gopal Shenoy, a blogger and software product manager, extended the strategy to the private sector: “Don’t walk away thinking that you can only talk to one customer, you can only attend one trade show, you can only make one customer happy,” he wrote. “What if everyone in your team talked to one customer a week, made one customer happy, helped the salesperson close one more deal. How better off would you be?”

  Other Obama campaign viral tactics ran the gamut. A simple word-of-mouth approach revolved around volunteers mentioning one positive thing about their candidate any time they were asked for the time. The mobile arm of the campaign could text 3 million volunteers with schedules, speeches, and video links while a viral tell-a-friend mechanism made it simple to forward the site to another person’s phone. To attend Obama rallies, participants were required to provide an email address and cell phone numbers. Within hours the campaign was already asking for donations and referrals to other friends, urging them to form “affinity groups” to further spread the network. The campaign took full advantage of YouTube, posting Obama’s speeches, events, and advertisements on its own channel that could be spread user-to-user or through links embedded on blogs. A viral tell-a-friend mechanism made it possible to forward information to another person’s phone.

  Barack Obama’s campaign wasn’t the first to unleash the p
ower of the Web on politics. Howard Dean did this in 2004, but he wasn’t able to translate his fundraising prowess and eager support base into primary votes and victories. Joe Trippi, the campaign’s strategist, compared his team to “the Wright brothers,” while Obama’s “skipped Boeing, Mercury, Gemini—they’re Apollo 11, only four years later.”

  Viral schemes are not only applicable to politics and businesses. They are a natural for nonprofit organizations. On Facebook, the number-one most popular social application isn’t a game or a mobile app. It’s Causes, which lets users promote a favorite charity and induce friends in their network to contribute. The mission of another organization, JustGive, is to connect people with the charities and causes they care most about. The idea is simple. If twenty-five people make a donation and each person convinces twenty-five others to donate, there is the potential for an exponential increase in both donors and donations.

  In the spring of 2009, Razorfish, a digital agency owned by Microsoft, combined viral commerce and charity with a television-web promotion for All detergent. In a thirty-second commercial near the end of an episode of Donald Trump’s Celebrity Apprentice, contestants Joan and Melissa Rivers asked viewers to visit All’s website to view a couple of videos. Joan Rivers appeared in “Guess That Stain,” based on a fictitious game show, while daughter Melissa starred in “Laundry Fairy.” Every time a user shared one of the videos with a friend, All promised to donate 50 cents to the favorite charities of Joan and Melissa Rivers.

  All of this is a far cry from the traditional direct-mail solicitation, which can cost a nongovernment organization hundreds of thousands of dollars for high-quality paper stock, personalized laser printing, postage, and a comprehensive list of addresses. Viral fundraising runs on a fraction of the cost and relies on volunteers to raise funds on behalf of a charity or cause.