Fat vs. Skinny

March 22, 2010

An interesting debate is a-happenin’ on the blogs between VCs Ben Horowitz and Fred Wilson. Ben started it with a guest editorial on AllThingsD, arguing that there’s no right way to finance a start-up. Lean or fat, they’re just tactics:

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.

His primary example is, not surprisingly, his own Loudcloud/Opsware experience and he details just how scary big their burn rate was at various times ($39 million in the quarter ending April 2001). And it succeeded, eventually selling to HP for $1.6 billion. Of course, Webvan and a bunch of others didn’t succeed with similar burn rates, and it’s not just because they ran out of capital. But Ben’s point is that they couldn’t have tried to build something at that scale trying to be lean and if the capital is there, grab it. Go big or go home… assuming tactically it’s the right thing to do.

Fred Wilson, who I have a ton of respect for and who has had one of the most successful track records over the last 10 years, won’t have any of it. On his blog he responds with the subtly named Being Fat Is Not Healthy:

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.

Fred argues that Ben’s experience is the outlier, proof that it’s not impossible to succeed with a fat strategy but not highly likely. Fred is as pithy as any VC so you’re better off reading his post to get the full brunt of it, he doesn’t hold punches.

Ben took that as a jumping off point for a longer response to Fred as a guest author on Marc Andreessen’s blog titled Revenge of the Fat Guy (that’s the post title, not Marc’s blog). If you’re still with me this far into the post, then it’s also worth a read. While I don’t agree with every one of his points, his overriding message is absolutely right: there’s no right financing strategy, but you better make sure you adopt the one that lets you survive and potentially thrive.

Having been a VC during the bubble years, I did have my own experience with the fat start-up when one of my early investments raised well over $100m in less than a year after my initial investment. Needless to say, the final return was a lot less than that. Money did buy the company time and that allowed it to figure out a second business much along the lines that Ben suggests. Unfortunately, the second business had to run lean to survive and the company’s culture had been built for fat. It was a tough transition and we ultimately sold the company for less than $40 million after buying out the late round shareholders for dimes on the dollar.

While I agree with Ben’s core argument, I doubt I’d personally ever work again with a company that made big fund raising a key part of its strategy. At least not until the next bubble.

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