Truisms don’t belong in entrepreneurship.

“Don’t scale until you have validated your business model.”

By Maxine Botesazan


It is almost as easy to make a case for, as it is to make a case against, the popular lean startup precept quoted above.  Obvious examples of companies betraying this statement are Facebook, Twitter, and foursquare; these companies focused on scaling their respective core products before demonstrating positive unit economics. In fact, the phrase “unit economics” sounds funny when considering the rise to success of these sorts of platforms. An example of a company that instead vehemently abided by this statement is RentJuice.¹

In the example of RentJuice, founder and CEO David Vivero put together a compelling case for market demand and high margins before spending large sums of money on scaling his business. John Zdanowski, a RentJuice investor as well as a member on the Board of Directors, explained,

“Maybe it’s the former CFO in me, but I’d rather have a business that’s generating revenue with profitable unit economics first, and then go after viral network effects. A lot of companies that go viral never figure out how to monetize.²

Foursquare is attempting to tackle the challenge Zdanowski references right now. So is Facebook with its mobile product. Having established virality, what is the best way to monetize?

The point I wish to illuminate in the comparison between RentJuice and foursquare is that some forms of scaling can completely change the monetization game. Not unlike its contemporaries (i.e. LinkedIn, Facebook, Twitter), by means of scaling, foursquare was able to establish a multi-sided platform³ before establishing a clear path towards monetization. This sort of scaling – engaging at least two distinct customers to establish and harness not just direct, but also indirect, network effects has significant consequences for potential monetization.  For RentJuice (addressing real estate) and Foursquare (addressing everyday commerce), creating and scaling an MSP can dramatically increase each platform’s value proposition. When the ma’ and pa’ shop down the road can all of a sudden share information with thousands of Cambridge residents, that changes foursquare’s customer value proposition and potential business model. When a competitive real estate agent can connect more seamlessly with several of his/her clients, that increases the agent’s willingness to pay and also has implications for RentJuice’s overall business model. Enhanced business models have tremendous implications for a startup’s valuation in both subsequent funding rounds and its ultimate exit.

The argument I make here isn’t that virality should precede an established business model, or vice versa. Instead I seek to challenge such precepts in the world of entrepreneurship. Every startup is disrupting a different market and has different levers that may or may not affect its ultimate avenue of monetization. While there is value in taking a “lean” approach to establishing a business (from both an entrepreneur and an investor’s perspective), as reassuring as they may be, truisms have no home in entrepreneurship.

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¹ RentJuice is a software platform that provides technology and marketing services to real estate agents and brokers to help manage and market their inventory, communicate with their clients, and do all their paperwork in one simple interface (adapted from CrunchBase: http://www.crunchbase.com/company/rentjuice#ixzz2LfEZav7t)

² Harvard Business School case, “RentJuice”, 9-811-069. Page 11.

³ (MSP) a product or organization that creates value by enabling direct interactions between two or more distinct types of customers. Adapted from Wikipedia: http://en.wikipedia.org/wiki/Two-sided_market