Do you need to prove your business model before scaling?

By Jacob Montoya

An important lean startup precept that we have learned in our LTV class is to not scale a business until you have validated your business model.  Scaling too fast can take many forms such as spending too much money on customer acquisition without a validated product, investing heavily in product features meant for too wide of an audience range, or hiring employees too fast.  This type of scaling can lead to a bloated company with a product that doesn’t pass the “I need it” test from customers.  In fact, many would say that scaling too fast is the main reason most startups fail.  Then how do we then explain why select companies like Facebook, Twitter, and Pinterest have been extremely successful by scaling quickly without having validated their business model?

I would argue that the reason these types of businesses have been successful despite ignoring the lean scaling precept, is that these are platform businesses that rely heavily on network effects and they must behave differently due to inherent characteristics of networks.  A platform business’ entire value is dependent upon its user-base so in order to test viability, these businesses must test their product’s (the platforms) value to their customers (users, advertisers, etc.) just like a non-platform business such as the BabbaCo team tested their product (the boxes) with their customers (mothers). 

The only real way to test the success of these types of platforms is to scale, but along the way these businesses should continuously test, hone, and identify ways to monetize these platforms without impacting this scaling growth.  Businesses based on network effects are often easier and cheaper to scale due to the virality that often accompanies them.  When dealing with products/platforms with strong network effects it is also critical to scale quickly because these are often winner-take-all industries.  All of these factors lead to a riskier start-up for businesses that rely on network effects as compared to other businesses that can do validation without scaling, but they also result in a meteoric rise for the companies that can deal with the risk and scale quickly to test their business model.

Pinterest for example was founded in March 2010 and experienced incredible growth to 11 million visits per week by mid-December 2011 well before it had established a business model.  As its user base grew, the value to each individual grew because they were able to see more content, find people similar to them, and connect with friends.  This feedback loop combined with Pinterest’s virality allowed it to scale relatively quickly without a huge amount of spending on customer acquisition, so that Pinterest could see whether there was value in its platform to users and businesses relatively inexpensively.  It was also able to entrench itself relatively quickly as a social network heavyweight so that it can now evaluate various business models easily with its size and value to consumers established.

Based on these examples, the conventional advice of “Don’t scale the business until you have validated your model” does not always apply to platform companies that are reliant on network effects.  For these platform companies, one must quickly test the value of the network to users/customers but at the same time the startup should realize the inherent riskiness of doing so and rely on virality and the inherent qualities of the network to scale without significant monetary investment.  To further minimize risk, these types of startups should rely on the fact that similar business models were demonstrated before.  This can provide significant understanding and help reduce the uncertainty related to specific business models.



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