Lean Startups? I Prefer Mine Phat

Opinion

I read the book and found it quite enjoyable.

And with all due respect to Eric Ries and all of the VCs out there chasing lean startups, I recognized one simple truth. I still like my startups Phat.

A phat startup aims to solve a very big, very difficult problem that will transform an industry. They typically take many millions, or even tens of millions and 1-3 years to get the first product out the door. They are big ambitious bets on deep technology and market transitions that are difficult to predict. They require invention and problem solving and risk, yes risk. They are a venture in the true sense of the word.

But my goal is not to dismiss the good ideas in the Lean Startup bible. There are many, but some simply don’t apply.

For example, in Phat startups, the challenge is not whether customers will want it (or whether you need to pivot or iterate or some other euphemism). The challenge is whether it can be built in the first place—will it work at all? Will it perform to spec? Will it scale? Will it be reliable? Can it be manufactured? Will it hit the price point?

Very frequently, the last question is whether customers will buy it. I know this sounds “unconventional” and decidedly old-school, but in many of these cases, if you CAN build it, they WILL come.

Why? Because phat startups often address problems that simply can’t be solved any other way, and customers are in dire need of solutions—from cancer treatments to robots for bomb disposal to switches capable of handing exponential growth in mobile data.

And that’s why, once the product is proven, phat startups have been many of our region’s, and our country’s fastest growing and biggest winners. All of these were $1B market cap companies:

Company $ Raised to 1st Revenue* Goal
Starent $30M+ Smartphones at 3G speeds
Athenahealth $13M+ Electronic medical records
Endeca $30M+ Enterprise search/analytics
A123 $30M+ Electric vehicles
Aveo Pharma $100M+ Cancer treatment
EqualLogic $20M+ Storage for virtual infrastructures
Netezza $35M+ Big data analytics
iRobot $15M+ Military robots
Acme Packet $20M+ SIP/VoIP enablement

*These are my estimates based on VentureSource.

And there’s a new generation of New England companies following in their footsteps:

Demandware (on-demand e-commerce), QD Vision (display color enhancement), 24M (grid storage), 1366 (direct solar wafer), Plexxi (10 GB networks), Affirmed (4G Mobile), Actifio (secondary storage), Qualtre (smartphone components), Xtalic (electronic components), Akiban (scale out databases).

But a key question comes to mind: Are phat startups riskier than lean startups? It depends how you measure risk.

One of the great virtues of lean startups is that they get customer feedback very quickly, on precious little capital. This can lead to a “hot” financing at an attractive price. But great early customer feedback is necessary but not sufficient in achieving long term success. For the most part, social/digital media categories are winner take all. They support a limited number of successful companies (typically one dominant, one contender) and the rest fail due to lack of attention.

A young company can get great feedback, get out of the gate with great growth only to be beaten to the punch by any number of others pursuing a similar dream. Perhaps equally common, a fickle market moves to a shinier new toy (Friendster → MySpace → Facebook). That’s not to suggest that there won’t be very valuable Lean Startups who “win” their chosen space. There will be, and for the lucky entrepreneurs/investors involved, the rewards can be handsome.

Phat startups have a different risk profile. Venture backed competition is often sparse or non-existent. The key risks are a) whether the technology can be built, and b) whether customers will adopt.

The first of these risks is often overblown. Of the 140 companies we’ve backed at NBVP, I can think of exactly two that couldn’t get the technology to work. Delays are typical, some would say inevitable, but rarely fatal. The risk of market adoption, however can be significant and I’d suggest is the primary reason that phat startups fail. Market adoption is largely a function of the initial premise—that there are customers (lots of them) that have no other way to solve the problem at hand. The bigger the disruption, the less the risk. The phatter, the better.

All told, a truly disruptive phat startup can present the mythical low risk / high reward proposition. I have great respect for successful lean startup investors, it’s just not for me. I’d take the phat startup risk / reward every time.

Maybe someday, someone far more articulate than I (or is it me?) can write a book on the virtues of Phat Startups. In the meantime, I hope we can all recognize the virtue in building these companies and the impact they can have on our innovation economy.

P.S. For those with a sense of humor, this says it better than I ever could (including some offensive language).

Jamie Goldstein is a general partner at North Bridge Venture Partners. He is President of the Board of the New England Venture Capital Association. Follow @

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