"Jack Sprat could eat no fat.
His wife could eat no lean.
And between the both of them, you see
They licked the platter clean."
It looks like we've got yet another semantic dustup going on in Startup City. A couple of weeks ago it was about ridding the world of the term "fail fast", and last week, a battle broke out between Lean and "fat" startups. The breaker-outer was Ben Horowitz of Andreessen Horowitz, who wrote an op-ed piece for the Wall Street Journal's All Things Digital website titled "The Case For the Fat Startup." In his article, Horowitz reviewed the history of Loudcloud and Opsware, the companies that he and Marc Andreessen co-founded, and argued, in his words, 'The best companies can raise money even in this market. If you are one of those, you should consider raising enough to wipe out your competition."
Fred Wilson, a well-known New York-based VC, argued in his blog post titled "Being Fat Is Not Healthy" that "I have never been involved in a successful software-based web service that raised and spent boatloads of money before it found it's (sic) sweet spot." He points out that Loudcloud and Opsware raised $350MM in four rounds of financing, including an IPO, in the space of 15 months. The only reason that they were able to do that was because the companies had been co-founded by Marc Andreessen, and Netscape made a bunch of people rich.
If Loudcloud and Opsware had been founded by two different people, even if their resulting services and products were exactly the same, they would have had a dramatically different outcome, because they would have only been able to raise a fraction of the capital. In statistics, we call something that is so far outside the realm of normal occurence an "outlier". Loudcloud and Opsware were outliers, and using an outlier as proof of the validity of a concept is like saying "I won $10 million in the lottery, so anyone can do it." Technically, yes, "anyone" can do it, but the odds against it are astronomical.
Wilson argues that once you've got your product/market fit right and you're sure that you're pursuing a real market and not a mirage, then go ahead and raise all the money that you can. Loudcloud didn't do that. It raised and spent an enormous amount of money only to learn that it didn't have a good product/market fit. (Horowitz claims that Loudcloud had, in fact, found a viable product/market fit, but then why did he decide to sell it off and focus on software?) It could have learned that it had an insufficiently appealing product/market fit by spending only a fraction as much as it did, and then put its resources into the real market opportunity that it finally identified. And it's true that reaching a product/market fit isn't a binary decision; it takes time. However, I'd argue that you want to floor the accelerator when you've found the right fit, not the first fit.
I worked with Ben at Netscape, and I consider him a friend, but the approach he advocates smacks of both "Ready, Fire, Aim" thinking and the now-discredited "get big fast" philosophy of the dot-com boom. I'd argue that Loudcloud spent the money because it had access to the money. If it hadn't had access to so much money, it would have been run very differently.
When you know that what you're doing is right, by all means raise the money you need to "crush your competition." There are also businesses where the capital investment required to even figure out if you're going in the right direction is so high that there's no alternative to being a fat startup. But for most software companies, being fat won't be a winning strategy for either entrepreneurs or investors.