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. ┬áSo 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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