Ben Horowitz has a post called The Case For The Fat Startup on the All Things D blog. I don’t agree with Ben’s take on this issue but I have enormous respect for Ben and his partner Marc Andreessen. They have started and built multiple successful businesses and all I do is write checks. So take everything I have to say with that in mind.
I’d also like to say that my comments are only related to software-based businesses. I don’t think it is applicable to greentech or biotech. Those sectors are much more capital intensive than software.
In short, since I started investing in the web in ’93/’94, I have invested in about 100 software-based web companies. And the success rate of fat companies versus lean companies is stark. I have never, not once, been successful with an investment in a company that raised a boatload of money before it found traction and product market fit with its primary product.
Boatload is a subjective term. So is traction. So is product market fit. And so is successful. So let me try to define them in the way that I think about them. A boatload of cash is more than $20mm of invested capital. A boatload of cash is monthly burn rates of tens of millions of dollars. Traction and product market fit are customers or users buying or using your product in droves. It is the realisation that you’ve found the sweet spot of the market you were going for. And successful is an investment that pays out multiples of the dollars we invested in it. Getting our money back is not successful in my book. Getting three times our money back is good. More than that is great.
Let me say it again. I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it’s sweet spot. But it has happened. The Loudcloud story that Ben lived and tells in the All Things D post is proof that it can happen.
You can also win the lottery. The odds aren’t great that you will. But millions of people play it every day. I don’t.
The very best investments that I have been involved in established product market fit before raising a lot of money. That’s how Geocities did it. That’s how Twitter did it. That’s how Zynga did it. That’s how every single one of my top 20 web investments in my career did it.
Many of them also went on to raise and spend a boatload of money on the way to getting profitable. Not all of them needed to do that. But the thing that is true about every single one of the 20 most successful web software investments I’ve been involved in is that they had significant user or customer adoption before ramping up hiring and spend.
I think there are a number of reasons why that is true. Although Loudcloud was able to reinvent itself with hundreds of engineers on the payroll, I think it is very hard to be nimble and quick when you have hundreds (or even dozens) of engineers and other employees. It helps to be lean and agile when you are trying to fit your product to the market. It is also nearly impossible to pull off the kind of funding history that Loudcloud pulled off when you are not successful with your initial product. Ben explains that Loudcloud raised $350mm in four rounds of financing (including an IPO) in the first 15 months of its life. Marc Andreessen and Ben Horowitz can do that. Most of you can not.
All of this said, I think Ben does a service to point out that raising a lot of cash and making a large investment in the business is a big positive. But in my opinion you only want to do that once you are 100% sure and have ample evidence that your product has hit its stride, you’ve got yourself in the place you want to be in your market, and you can raise the capital without taking much dilution. If all of those boxes are checked yes, then go for it. But please spend it wisely.
Fred Wilson is a partner at Union Square Ventures. He writes the influential
, where this post was originally published.
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