Fat v. Lean Startups: Which are Better?

The uber-venture capitalist Fred Wilson, of Union Square Ventures in Manhattan, told a group of tech entrepreneurs last month that "arguing for lean startups in front of a Web crowd is like arguing for smaller government in front of a bunch of Republicans." Not much argument there, right?

But what is best for social innovation startups? Should they start out with a lot of cash or keep their funding to a minimum? Opinion is starkly divided.

Wilson, for his part, keeps insisting that lean is better, regardless of what kind of startup you are. "The success rate of fat companies versus lean ones is stark," he told people attending last month's TechCrunch Disrupt conference in New York.  "I have invested in about 100 software-based companies since 1993-94 -- social and otherwise --and 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...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."

Okay, but what if you're a startup that needs a lot of capital just to get a seat at the table? There are some opportunities and ideas that can't be tackled with "lean," argues Ben Horowitz, cofounder and general partner of Andreessen Horowitz, a $300 million venture fund based in Silicon Valley. (Horowitz previously was the CEO of Loudcloud/Opsware, which he founded with Marc Andreessen and sold to HP for $1.6 billion.) "Lean theory is a good tactic but as an operational theory, it has a few holes."

Here's what Horowitz argues:

* Lean startup theory presumes you know when you've achieved product-market fit. "This, however, is often quite unobvious," Horowitz told the TechCrunch crowd. Consider Apple. "Apple's iPod did not sell 1 million units until two years after it was launched. Compare this with the iPhone, which sold 1 million units in its first three days. At what point did the iPod have product/market fit and at what point should Apple have invested in the mini and the nano? By lean startup theory, maybe not for a while -- but that would have been incorrect," Horowitz says.

b) Lean startup theory presumes that once you have product/market fit, you cannot lose it. "This also is not the case," says Horowitz.  Consider Netscape. It had product/market fit on the browser but lost it when Microsoft eliminated the market for browsers. "We were doing $250 million in revenue per year at the time but at that point ... we had to regain product/market fit and didn't have the luxury of taking the time to do it in a 'lean start-up' way," Horowitz says. "We ended up building the server product line from zero to $600 million in two years by applying what might be referred to as the fat methodology."

And third? Lean startup theory presumes there is no competition. "So what happens if, prior to achiving product/market fit -- and prior to building the product that you believe that everyone wants -- a very scary competitior emerges?" He said VMware had this issue, but thanks to "fat cash theory," the software startup was able to double its head count each year to take the market ahead of competitors like Microsoft.

So why is this lean v. fat debate considered important--and increasingly so in social innovation circles? Horowitz says he worries that "a lot of entrepreneurs are harming their companies by avoiding some really important things that cost money" -- like a sales force or top production talent. But even more worrisome? Horowitz says he sees some entrepreneurs avoiding the really big ideas. "Every day, somebody comes into our office from Harvard or Stanford or MIT -- including brilliant computer scientists -- and they pitch us on very small ideas, and this is tragic," Horowitz says. "...Building a company is really hard so you might as well build something important, something that will change the world. If being lean is a way to reach your goal, then fine. But if your goal requires being fat, then remember that big can be beautiful, too."

What do you think? Is the lean-is-meaner mantra stifling innovation?