Agile VC:
My idle thoughts on tech startups
Fat vs Lean – You’re Both Right
March 22, 2010 · 3 min.
Ben Horowitz of Andreessen Horowitz and Fred Wilson of USV have been having a blog debate on whether entrepreneurs should pursue a “lean” or “fat” approach to building software-based startups.
Wilson – Being Fat is Not Healthy
When you have time to read the full text of each of their arguments I’d encourage you to do so. The comment thread on Fred’s post is also very lively.
Horowitz draws primarily on the Loudcloud/Opsware story to make the case makes for the “fat” startup, and the highly condensed version is:
- Operating too lean may mean you ultimately fail to win the market
- The death of all failed startups is ultimately going broke
- Product market fit is rarely a singular event where it becomes “obvious” to go big
- Even in a challenged VC environment availability of capital is rarely a constraint for the best companies
Wilson’s main points are:
- His most successful investments (Geocities, Twitter, Zynga) all achieved large scale & product/market fit on modest amounts of capital (< $20M by his definition)
- Raising lots of dough can lead to profligate spending
- Most entrepreneurs don’t have the luxury of raising boatloads of capital prior to achieving scale & product/market fit
I don’t really see why entrepreneurs or early-stage investors have to have “religion” around this issue… IMO both these guys are right in some senses. I dislike drawing conclusions from our own personal experiences alone, almost always an inherently small data set, but both Wilson and Horowitz did it so at least I’m in good company 🙂
The story of PayPal was clearly one of the fat startup, having raised well over $100M before meaningful revenue and over $200M before IPO and subsequent acquisition by eBay. So if I drew my conclusion from PayPal then I’d vehemently agree w/ Horowitz. LinkedIn on the other hand was arguably a comparatively lean startup, at least for those on the VC path, and only raised about $15M in two VC rounds before achieving meaningful scale (8-figure revenue). Only then did the company go on to raise substantial capital (Ser C, esp. Ser D round) to solidify position as an emerging winner in online professional networking. So LinkedIn clearly supports Wilson’s perspective.
The reality is that Wilson is correct that most startups probably can’t / shouldn’t raise tons of capital during their formative phases. The start lean, end fat approach makes sense for lots of software-based companies. But Ben’s point that uncompromising devotion to lean startup principles can ultimately limit a company’s ability to dominate a market, and if/when a startup has capital it should use it to build sustainable competitive advantage. Similarly there are certain sets of problems that may not be solvable with a lean approach.
Assume that a startup calibrates funding levels & sources with the various phases of a company lifecycle, e.g. they raise capital based on the company’s ability to achieve value-creating milestones, not based primarily on the investment model of their funding source. Then the more interesting question is how do you know when to begin evolving from lean to fat? How can entrepreneurs shift their mindset at the appropriate combination of inflection points?
If you start day 0 with a fat startup approach, your focus may not be appropriately sharp and you have a bigger hill to climb towards a great economic outcome for all constituents. My guess is that Horowitz would broadly agree with this notion, and the fact that his firm makes seed investments as small as $50-100K suggests as much. But similarly once you start to prove your model at small scale, operating too lean may prevent a startup from truly establishing market leadership and all the upside that provides. Wilson would probably agree with this too… given the scale of the advertising and hiring it’s doing, it’s not as though Zynga is slowly rationing out capital these days.
So my message as follows… start lean. Work hard to realize when when you’ve hit your inflection points, which are rarely black or white. But if you have the opportunity and desire to be huge, evolving towards fat probably makes sense. After all, we all aspire to be that 800lb gorilla in our market…