7 ms·

The Case for the Fat Start-Up

80 points by newsit 17y ago

hristov 17y ago
This is a pretty good article. The ideas are things that both Paul Graham and Joel Spolsky have mentioned many times in their articles but it is nice to see these ideas backed up by some real experience.
ww520 17y ago
He has a good point in focusing the real goals rather than the means.
samd 17y ago
"In fact, the market thought it was a terrible idea: Our stock promptly lost 80 percent of its value, putting our market cap at about $28 million. It’s worth pointing out that this was about $40 million less than the cash that we had in the bank." Efficient market my ass.
- prodigal_erik 17y ago
  A rational market has to discount your bank balance by the probability they will ever see their piece of it. It's rare now for a company to wind down in an orderly way, rather than spend all their money trying to recover and then fold.
- deleted 17y ago
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- hristov 17y ago
  I agree that the efficient market theory is generally wrong, but this example seems a bit extreme. I am surprised one of the sharks out there did not take over the company to merely shut down everything and get the cash. It could be that Mr. Horowitz was excluding certain privately held shares from the market cap. Or maybe there were liabilities so that while they had 68 million in cash they did not have 68 million in net assets. Or maybe they had a poison pill.
  - ghshephard 17y ago
    It was a thin market - almost no liquidity. There were days when it was in the 40-50 cent range that I would purchase 5000 shares and see my _actual trade_ move the price of the stock a few cents. Anybody who had actually tried to purchase significant amounts of stock would have quickly brought the price of the stock up north of a dollar. In fact, when the new CFO, Sharlene Abrams came on board, the stock popped up in due course.
swombat 17y ago
All very good points, but Ben Horowitz actually completely missed the point of the Lean Start-up approach that people like Eric Ries are proposing. "Lean" does not mean cheap. "Lean" means focused on progress, which is measured in validated learning about your customers. Conflating "lean" with "cheap" serves no one. This article is arguing against cheap start-ups, not against lean start-ups. This video includes some discussion, from Eric Ries, of how people are misunderstanding "lean" to mean "whatever they think will get the VCs to fund them": http://vimeo.com/9964506 http://vimeo.com/9964506 The whole "lean start-up" meme emerged with Eric Ries, as far as I know, so I think his definition of it is worth paying attention to.
- staunch 17y ago
  I don't think we need to leave it to Eric Ries to define what a lean startup is. It's been all the rage in the valley since at least when Flickr sold in 2005.
  - swombat 17y ago
    Have you got some links about this?
    - staunch 17y ago
      Most obvious one: March 2005: http://www.paulgraham.com/start.html http://www.paulgraham.com/start.html "Not Spending it". From Eric Ries: Sep 2008: http://www.startuplessonslearned.com/2008/09/lean-startup.html http://www.startuplessonslearned.com/2008/09/lean-startup.ht... "1. Lean in the sense of low-burn..."
      - swombat 17y ago
        I don't see the word "lean" used once in that article by PG, so for now, I'm going to continue to assume that Eric Ries largely coined "lean start-up" and so has some ownership of the definition of it.
Jim72 17y ago
He had me until he quoted Kanye West.
- Jim72 17y ago
  Wow, we have some Kayne West fans. Say what you want about him, but I wouldn't want his name connected to my start-up... not if I wanted to be taken seriously. Might as well quote Glenn Beck while you're at it.
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  - zackattack 17y ago
    Kanye is far more successful than you, and has contributed far more to society.
    - shadowsun7 17y ago
      I think the point to be made here is that your comment isn't particularly constructive. Hence the down-votes.
      - Jim72 17y ago
        On the contrary, if you stop and think about it, my comment is constructive; especially if you care about brand management. The simple fact is, Kayne's brand is tainted by his actions and diatribe. As a start-up, I would not want to engage my brand in the kind of controversies he stirs up (unless I was targeting only his fans as my demographic).
        zackattack 17y ago
        Dude, what are you smoking? The only person for whom Kanye's brand may be tainted is George Bush, who probably secretly thinks Kanye is hilarious. You seem to be severely out of touch with contemporary culture and reality.
staunch 17y ago
Shooting for the stars simply isn't in the best interests of the founders. That's why it's not popular. The most common exit now is a relatively small acquisition. All founders want (their first time anyway) is to walk away with FU money. Shooting for a $1.6 billion exit simply isn't worth the risk. Better to sell for $50 million to the guy that's shooting for the stars.
sachinag 17y ago
Oh, goddammit: Lean Startups aren't Cheap Startups: http://steveblank.com/2009/11/02/lean-startups-aren’t-cheap-startups/ http://steveblank.com/2009/11/02/lean-startups-aren’t-cheap-... Horowitz agrees with sgblank and ries!
- staunch 17y ago
  Are you sure he does? There's plenty of overlap, so it's easy to see the similarities, but he's talking about spending tens of millions per month investing in software development. Having 100 people when you could get by with much less. Outspending the competition. That sounds different to me.
  - swombat 17y ago
    It's not. Ries and Blank argue for focusing your money expenditure on validated learning about your customers. They don't argue for whether you should spend more or less. You could have a lean start-up that burns $10m a month.
    - staunch 17y ago
      Well they're making up a new definition of lean if having 100 people when you could easily get by with 40 counts as lean.
      - swombat 17y ago
        The point of a start-up isn't to "get by", it's to discover, prove, and then scale up a new business model. "Getting by" is pointless if you haven't found your product/market fit. You need to invest in finding it until it's found. If that takes 100 people, then that's how many people you should hire (if you can afford it).
        staunch 17y ago
        That's just dodging the very real decision he had to make. He could continue searching for product/market fit with 40 people or he could do it with 100. There's no "right" answer, they're just different approaches. Many people would (and did) advocate taking the leaner approach, but he took the fatter one...
deleted 17y ago
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tigger2010 17y ago
Scanning the comments, there's a fair bit of argument about lean vs. cheap and about whether Horowitz is agreeing or disagreeing with the "lean" approach. Afaik, all he's saying is "it depends". There may be situations e.g., if your competition is cash poor and you are cash rich, where the "fat startup" approach makes sense. It doesn't seem like he's fundamentally arguing for or against "lean" - just that a lean or fat stance only makes sense in specific contexts.
ghshephard 17y ago
Okay, as one who lived through pretty much all of Loudcloud/Opsware, I can tell you that Ben pretty much nailed every single event of that 1999 - 2003 arc (when I left Opsware) pretty flawlessly. What he glosses over a little (but not totally) was how fucking traumatic those layoffs were back in 2002. I recall him stating (and our VP of HR not believing he was saying it) at the completion of the cuts that there would be "no more layoffs while he was CEO". He just never wanted to go through anything like that again, so he cut as deep as he thought was need to avoid future rounds - one big round up front. I don't know if it's relevant, but he also doesn't mention that a ton of employees were thinking of $20-$30 stock that then reverse split and went out at $6 (or $3 pre-reverse). The IPO was totally anti-climatic. We didn't even have a party. When we had our "Opsware Founders Meeting" in Santa Cruz there was a very big deal made of the fact that we could go a _long_ time without getting a single new customer, and still not run out of cash (though, he always refused to answer my question of what Opsware would do if EDS canceled their contract with us, or just didn't pay us. :-). Not running out of cash was a very, very big deal. Also, Opsware was a pretty big byzantine pieces of enterprise software (at the time, mostly written is Python, which was pretty forward looking for 1999-2000 - Ray Soursa had to convince people that no, perl would not be our platform), with all sorts of knobs and dials, and, they were still a public company, which meant there was a pretty good sized staffing overhead that your typical "startup" wouldn't see. It's not clear to me that there was much fat left on the bone by the time he was done chopping. All in all though - the story is definitely worth reading over a few times - everything there happened pretty much exactly as he's calling it. Gem of an article, and Ben is easily one of the best technical company CEOs out there so that adds even more value to the read.

80 points by newsit 17y ago

This is a pretty good article. The ideas are things that both Paul Graham and Joel Spolsky have mentioned many times in their articles but it is nice to see these ideas backed up by some real experience.

ww520 17y ago

He has a good point in focusing the real goals rather than the means.

samd 17y ago

"In fact, the market thought it was a terrible idea: Our stock promptly lost 80 percent of its value, putting our market cap at about $28 million. It’s worth pointing out that this was about $40 million less than the cash that we had in the bank." Efficient market my ass.

prodigal_erik 17y ago
A rational market has to discount your bank balance by the probability they will ever see their piece of it. It's rare now for a company to wind down in an orderly way, rather than spend all their money trying to recover and then fold.
deleted 17y ago
[deleted]
hristov 17y ago
I agree that the efficient market theory is generally wrong, but this example seems a bit extreme. I am surprised one of the sharks out there did not take over the company to merely shut down everything and get the cash. It could be that Mr. Horowitz was excluding certain privately held shares from the market cap. Or maybe there were liabilities so that while they had 68 million in cash they did not have 68 million in net assets. Or maybe they had a poison pill.
- ghshephard 17y ago
  It was a thin market - almost no liquidity. There were days when it was in the 40-50 cent range that I would purchase 5000 shares and see my _actual trade_ move the price of the stock a few cents. Anybody who had actually tried to purchase significant amounts of stock would have quickly brought the price of the stock up north of a dollar. In fact, when the new CFO, Sharlene Abrams came on board, the stock popped up in due course.

swombat 17y ago

All very good points, but Ben Horowitz actually completely missed the point of the Lean Start-up approach that people like Eric Ries are proposing. "Lean" does not mean cheap. "Lean" means focused on progress, which is measured in validated learning about your customers. Conflating "lean" with "cheap" serves no one. This article is arguing against cheap start-ups, not against lean start-ups. This video includes some discussion, from Eric Ries, of how people are misunderstanding "lean" to mean "whatever they think will get the VCs to fund them": http://vimeo.com/9964506 http://vimeo.com/9964506 The whole "lean start-up" meme emerged with Eric Ries, as far as I know, so I think his definition of it is worth paying attention to.

staunch 17y ago
I don't think we need to leave it to Eric Ries to define what a lean startup is. It's been all the rage in the valley since at least when Flickr sold in 2005.
- swombat 17y ago
  Have you got some links about this?
  - staunch 17y ago
    Most obvious one: March 2005: http://www.paulgraham.com/start.html http://www.paulgraham.com/start.html "Not Spending it". From Eric Ries: Sep 2008: http://www.startuplessonslearned.com/2008/09/lean-startup.html http://www.startuplessonslearned.com/2008/09/lean-startup.ht... "1. Lean in the sense of low-burn..."
    - swombat 17y ago
      I don't see the word "lean" used once in that article by PG, so for now, I'm going to continue to assume that Eric Ries largely coined "lean start-up" and so has some ownership of the definition of it.

Jim72 17y ago

He had me until he quoted Kanye West.

Jim72 17y ago
Wow, we have some Kayne West fans. Say what you want about him, but I wouldn't want his name connected to my start-up... not if I wanted to be taken seriously. Might as well quote Glenn Beck while you're at it.
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- zackattack 17y ago
  Kanye is far more successful than you, and has contributed far more to society.
  - shadowsun7 17y ago
    I think the point to be made here is that your comment isn't particularly constructive. Hence the down-votes.
    - Jim72 17y ago
      On the contrary, if you stop and think about it, my comment is constructive; especially if you care about brand management. The simple fact is, Kayne's brand is tainted by his actions and diatribe. As a start-up, I would not want to engage my brand in the kind of controversies he stirs up (unless I was targeting only his fans as my demographic).
      - zackattack 17y ago
        Dude, what are you smoking? The only person for whom Kanye's brand may be tainted is George Bush, who probably secretly thinks Kanye is hilarious. You seem to be severely out of touch with contemporary culture and reality.

staunch 17y ago

Shooting for the stars simply isn't in the best interests of the founders. That's why it's not popular. The most common exit now is a relatively small acquisition. All founders want (their first time anyway) is to walk away with FU money. Shooting for a $1.6 billion exit simply isn't worth the risk. Better to sell for $50 million to the guy that's shooting for the stars.

sachinag 17y ago

Oh, goddammit: Lean Startups aren't Cheap Startups: http://steveblank.com/2009/11/02/lean-startups-aren’t-cheap-startups/ http://steveblank.com/2009/11/02/lean-startups-aren’t-cheap-... Horowitz agrees with sgblank and ries!

staunch 17y ago
Are you sure he does? There's plenty of overlap, so it's easy to see the similarities, but he's talking about spending tens of millions per month investing in software development. Having 100 people when you could get by with much less. Outspending the competition. That sounds different to me.
- swombat 17y ago
  It's not. Ries and Blank argue for focusing your money expenditure on validated learning about your customers. They don't argue for whether you should spend more or less. You could have a lean start-up that burns $10m a month.
  - staunch 17y ago
    Well they're making up a new definition of lean if having 100 people when you could easily get by with 40 counts as lean.
    - swombat 17y ago
      The point of a start-up isn't to "get by", it's to discover, prove, and then scale up a new business model. "Getting by" is pointless if you haven't found your product/market fit. You need to invest in finding it until it's found. If that takes 100 people, then that's how many people you should hire (if you can afford it).
      - staunch 17y ago
        That's just dodging the very real decision he had to make. He could continue searching for product/market fit with 40 people or he could do it with 100. There's no "right" answer, they're just different approaches. Many people would (and did) advocate taking the leaner approach, but he took the fatter one...

deleted 17y ago

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tigger2010 17y ago

Scanning the comments, there's a fair bit of argument about lean vs. cheap and about whether Horowitz is agreeing or disagreeing with the "lean" approach. Afaik, all he's saying is "it depends". There may be situations e.g., if your competition is cash poor and you are cash rich, where the "fat startup" approach makes sense. It doesn't seem like he's fundamentally arguing for or against "lean" - just that a lean or fat stance only makes sense in specific contexts.

ghshephard 17y ago

Okay, as one who lived through pretty much all of Loudcloud/Opsware, I can tell you that Ben pretty much nailed every single event of that 1999 - 2003 arc (when I left Opsware) pretty flawlessly. What he glosses over a little (but not totally) was how fucking traumatic those layoffs were back in 2002. I recall him stating (and our VP of HR not believing he was saying it) at the completion of the cuts that there would be "no more layoffs while he was CEO". He just never wanted to go through anything like that again, so he cut as deep as he thought was need to avoid future rounds - one big round up front. I don't know if it's relevant, but he also doesn't mention that a ton of employees were thinking of $20-$30 stock that then reverse split and went out at $6 (or $3 pre-reverse). The IPO was totally anti-climatic. We didn't even have a party. When we had our "Opsware Founders Meeting" in Santa Cruz there was a very big deal made of the fact that we could go a _long_ time without getting a single new customer, and still not run out of cash (though, he always refused to answer my question of what Opsware would do if EDS canceled their contract with us, or just didn't pay us. :-). Not running out of cash was a very, very big deal. Also, Opsware was a pretty big byzantine pieces of enterprise software (at the time, mostly written is Python, which was pretty forward looking for 1999-2000 - Ray Soursa had to convince people that no, perl would not be our platform), with all sorts of knobs and dials, and, they were still a public company, which meant there was a pretty good sized staffing overhead that your typical "startup" wouldn't see. It's not clear to me that there was much fat left on the bone by the time he was done chopping. All in all though - the story is definitely worth reading over a few times - everything there happened pretty much exactly as he's calling it. Gem of an article, and Ben is easily one of the best technical company CEOs out there so that adds even more value to the read.