When I read Ben Horowitz’s article “The Case For The Fat Startup” I expected to be in violent disagreement with most of it. So I was surprised to find myself mostly nodding in agreement. Many of the moves he describes that led to the survival and success of Opsware/Loudcloud were similar to the ones I advocated as an executive in a post dotcom bubble public company (Uproar.com). Cutting was important, but it was even more important to protect and build on the value that we had created.
So how can I find myself agreeing with Horowitz, when he seems to be such a vocal critic of Lean Startups?
Well first, he’s not against running leanly. He simply suggests that lean shouldn’t be the end goal. Instead, he recommends startups should be focused on survival and market leadership – both of which benefit from more money. However, his examples mostly center on companies that have significant traction. Take Facebook, which he touts as a “fat startup” because they have raised over $700m. The fact is that they didn’t start out fat; in their first year they only raised $500,000.
This mirrors my experience at multiple successful startups. Most maintained a very low burn in the first year, investing funds carefully to create a valuable product. Only after early users validated that it was a must-have product, did we start loosening the purse strings. Speed of execution to fully capture the opportunity became the primary objective. At this point, most of the companies were able to successfully attract additional financing (often very large rounds).
Perhaps the most important realization that I’ve made as a result of this debate is that: Lean Startup principles are most critical in the early stages of a startup before product/market fit. If you have not created a “must-have product” your ability to attract future rounds of financing will be limited if not impossible. Your best chance of survival is to create a must-have product on your first round of financing – with the overwhelming majority of funding going into R&D. Once you have created a must-have product, it will be much easier to raise enough money to capture and lead the market.
Of course, this could be an argument for a big first round of financing. I rarely advocate raising a small round if you can raise a big one. But it’s important to recognize that the best VCs invest small before traction and big after traction. They realize that overinvesting up front rarely improves a startup’s ability to create a must-have product. If you are fortunate enough to raise a substantial round up front, you’ll need discipline not to spend in areas that aren’t essential to creating a must-have product. If you have the right discipline, your only important risk of raising a big early round is limiting the potential for lucrative small early exits. But more likely you won’t be able to raise a substantial round until you have created a must-have product. Once you can prove an ability to scale cost-effective growth for this must-have product, smart VCs will be knocking down your door to invest as much as you can realistically absorb – and often more.
Note: Eric Ries clears up some of the common mis-perceptions about lean startups in this post.
Great post Sean.
It relates to what Mark Suster said recently regarding Salespeople at a Startup (don´t scale before PMF):
I think you nailed it with your argument about the size and objective of the first round.
I am wondering if there is a confusion between “lean” meaning “using little money” and “lean” meaning “using principles of lean manufacturing” – the primary principle being removing everything that gets in the way of delivering direct and immediate value to the end user…
I think every company large or small can benefit from the latter. But keeping lean in terms of burn rate also makes a lot of sense when a startup is still getting started.
Most entrepreneurs I’ve met recently could learn a lot from reading this. Namely, money won’t create what isn’t already there. It isn’t as if once you’ve raised funding everything else will fall into place.
I’m a big fan of this blog because it provides a very pragmatic education for founders instead of yet another post on how to raise seed/angel/VC funding. There’s a problem when a founder can talk for an hour about how to approach investors but doesn’t know the difference between a symmetrical and asymmetrical internet model.
David, thanks for helping to give a clearer definition of “lean.” I agree that I’m blending the concepts (as Ben Horowitz did). That’s why I linked to Eric Ries’ blog post that clarifies the “Four Myths About the Lean Startup”.