The Fat and Thin Start-Up

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Ben Horowitz posted a very interesting post on why ,sometimes, a start-up should spend a lot of money, if it helps them become the number one player.

I highly recommend reading it (thanks Ori for the ref) , as it gives a non standard view of a person who has a track record

I believe Marc Benioff took the same approach. He raised tons of money on his vision, much long before this vision could be sold to investors.

Some random thoughts:

  • I like the following quote :

If you are a high-tech start-up, your value is in your intellectual property. Don’t stare at your spreadsheets so long that you get confused about that.

  • One of the PointSec founders told me they had a similar case. They raised a lot of money before the 2001 crisis but were #2 in the market. Instead of cutting back they used it to gain every security certification in the world. If you did one of those you know they are very long,annoying and expensive. Coming out of the bubble burst, they were the only company with security certifications by almost all governments. It was key to beat their competition and created a very high barrier for entry, which allowed them to become the #1  player in full disk encryption.
  • It took a lot of guts for LoudCloud  to move from a hosting model to on premise model, but a start-up (even a rich one) has to focus. We are getting a constant stream of requests for using our service as an on premise product, but choose to focus on SaaS approach. Funny how in 2001 and 2010 the same approach leads to opposite conclusions.
  • Many great\large companies come from a very frugal background and  are still at it today. Spending more money than the competition is not the only successful method to win.
  • Maybe a company that  raises $350M it is not a start-up? Maybe it is quite a big VC ? or Just a holding company ?  With enough money and smart executive team one can start buying many small companies in the same domain and combine them into a market leader. The security business has some interesting examples and EMC has followed a similar strategy. Not that there is anything wrong with it, but it is a whole different ball game.
  • For most people raising $100M makes it nearly impossible to change the direction of the company, like Ben Horowitz did. The human psychology just works differently.
  • What salaries were they paying ? If the quarterly budget was 20M$ the yearly budget was $80M$, with 100 employees did they pay $800,000 per employee ? Even if they spent a lot of money on hardware (which seems they sold to EDS anyway ) even $200,000 per employee seems very high, since he says almost all of them were engineers.  Maybe I’m missing something.

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