Remember how famous dotcom startup Webvan spent $1 billion before going bust?
In a blog post at AllThingsD, Ben Horowitz makes the case for more of those types of “fat startups”– startups that need to raise and then spend a lot of money to win a big market.
Enough of these skinny Web 2.0 startups and their small raises, he says.
Horowitz is now half of renowned Silicon Valley VC firm Andreessen Horowitz, and before that was the CEO of Opsware, a company that got started in September 1999 and grew through the dot com bust to get acquired by HP for $1.6 billion. He knows a thing or two about running a startup during a downturn.
The “fat startup” idea goes against the trend of the lean startup, hot since the mid-2000. That philosophy holds that startups should spend as little cash about as possible to build their product and get to market.
Here’s the gist of his argument:
There are only two priorities for a start-up: Winning the market and not running out of cash. Running lean is not an end. For that matter, neither is running fat. Both are tactics that you use to win the market and not run out of cash before you do so. By making “running lean” an end, you may lose your opportunity to win the market, either because you fail to fund the R&D necessary to find product/market fit or you let a competitor out-execute you in taking the market. Sometimes running fat is the right thing to do.
Horowitz then runs through his experience at Opsware, with quarterly numbers to back it up. After the dot com bust the company, which was already public, went to 35 cents a share and a market cap of $28 million, $40 million less than its cash on hand. But despite what all the MBAs told him, Horowitz refused to cut payroll and R&D. He used the cash the company had raised to outspend its competitors, who were also hammered by the bust, and leave them in the dust.
So, Horowitz says, the lean startup isn’t a dogma. What matters is to be number 1 in a fast growing market. Sometimes you have to stay lean to do it but sometimes you have to spend big. He makes the case eloquently and with numbers.