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Fat vs. Lean Startups: What Works on the Web Is Different

The trendy philosophy for today’s web entrepreneurs is the idea of the “lean startup,” where young companies make use of readily available tools and quick iteration to figure out their business without spending much money. That idea, popularized by entrepreneurs Eric Ries and Steve Blank and endorsed by VC Fred Wilson, also has its detractors, such as VC Ben Horowitz, who argue that startups should best position themselves to win without running out of money.  So today at the TechCrunch Disrupt conference in New York City, Wilson and Horowitz debated each other.

VCs Fred Wilson (left) and Ben Horowitz flank moderator Erick Schonfeld at TechCrunch Disrupt

“Building a company is really hard so you might as well build something important,” said Horowitz, of the new and influential firm Andreessen Horowitz. He said he’s disappointed to see smart entrepreneurs pitching him on small ideas like ad targeting optimization and avoiding expensive things like hiring a sales force, all because they’re holding themselves to bare minimum expenses.

But Wilson argued that the best outcomes for both entrepreneurs and investors result from investing small amounts of money in risky ideas, and increasing the commitment as risk decreases. This ensures that founders are minimally diluted, as they can hold onto their significant stakes in the company if they don’t get desperate for funding because they’re running out of money. Even Zynga, which has raised something like $220 million in funding, isn’t exactly a fat startup, contended Wilson, as it hasn’t lost money following CEO Mark Pincus’ initial investment. Rather, those hundreds of millions have been the “insurance money” to allow Pincus and Zynga to make large risky bets without putting the company on the line.

Horowitz, besotted with the promise of dreaming big, responded by saying: “I have to pause because Fred has removed all the joy out of being an entrepreneur.” He pointed to big-thinking companies such as the electric car maker Tesla, which has raised hundreds of millions in private and government funding. “As an entrepreneur you really don’t have a choice. Often the idea and the market dictate the amount of money you need to build.” Wilson never really countered this point.

After Horowitz shot down Wilson’s self-described “fairly rigorous mathematical analysis” because it ignores the serendipity of startup opportunities, Wilson pointed out that Horowitz’ examples weren’t web companies. Sure, markets like automobiles and chips and biotech might need lots of money, but “in this sector, the web sector, I would argue there are very few ideas where the fat startup model makes sense.” This was his most salient point. Wilson also noted that managing large-scale companies takes experience, saying the first-time entrepreneurs he funded at Etsy, Twitter and Tumblr just weren’t ready. “I would not advise anybody to go fat startup if they don’t have that experience and that capability at day one.”

Asked by moderator Erick Schonfeld who made a more cogent argument, the crowd sided with Wilson. I found it surprising that the cite-the-spreadsheet argument was more compelling than advice to think big — but this was an audience of web startups, after all, where lean is the new black.

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7 Responses to “Fat vs. Lean Startups: What Works on the Web Is Different”

  1. Seems like someone should have pointed out that there is a third option, maybe call it “common sense,” that usually needs to be provided by an outsider because the pressures of a startup sometimes make it hard to see what’s reasonable.

    As the entrepreneur I’ve seen how hard it can be to find the right balance between spending money that you really should spend, and the desire to be seen as frugal – leaning too far one way or the other can be deadly. An open working relationship with the your funding source can supply the necessary common sense.

  2. “lean startup” as espoused by steve blank and Eric Ries has nothing to do with how much money a company has raised or should raise. Their lean comes from lean manufacturing techniques. This “lean vs fat” debate was on totally different definitions of the terms.

  3. les madras

    Excellent post as usual from Ms Gannes.

    If one is looking for a string of startups whose business model relies on Adsense revenues, Wilson is right. If one wants to make bets that make it big or fail Horowitz is right.

    If the last TC50 is any indicator, Wilson has the mindshare.

  4. Web is a platform. We need to start to think about the possibility of using the web about 95-98% of time online and the rest offline (the offline is mainly for convenience and privacy).

    The upcoming HTML5 that supports offline browsing is one option (cached data downloaded to a local machine… it has limitation…)

  5. The takeaway for me is that there are appropriate levels of funding for different types of startups. You shouldn’t over-fund a company that should be lean, nor should you “starve” a company who requires funding to reach their goals.

    The latter applies to winner-takes-all types of companies (like PayPal or Amazon). I think Ben’s position adds a needed voice for the other side of the argument. PayPal and Amazon (and others) would have failed if they didn’t raise the capital to own their market.