Can Students Build Fat Startups?

By: Dan Cahana (Wharton, ‘19)

Over the past decade, the lean startup movement has grown into both a guide for student founders and a cornerstone of the entrepreneurship curriculum at many business schools, including Wharton. The lean methodology is rather simple — it pushes startups to iterate quickly by building MVPs and validating customer demand before investing more resources into building out the product further. As its official website explains, “lean isn’t simply about spending less money. Lean isn’t just about failing fast, failing cheap. It is about putting a process, a methodology around the development of a product.”

Its adoption by founders and academics alike makes sense in that context. The constraints of founding a company as a student — namely capital — are aligned with the lower cost of this approach, while the lean startup’s principle of “entrepreneurship as management” lends itself to academic study. At WeissFund, we see nearly every team we meet embrace lean entrepreneurship to some extent, usually by working towards some sort of MVP in order to collect data from customers. In some cases, this even means testing the core insights behind software products with pen and paper before writing a single line of code. However, since 2010 a growing chorus of influential founders and VCs had begun championing a very different approach.

The Rise of the Fat Startup

The roots of the fat startup movement can be traced to a blog post by Ben Horowitz of a16z in which he explains how he used a very costly approach to turn around his company, Opsware, eventually leading to a $1.6B exit to HP. In that post, Horowitz states that the fat startup fundamentally prioritizes winning the market over not running out of cash. Since then, others have expanded the vision of the fat startup, and begun rejecting the focus on constant testing of bare-bone products and instead instructed company-builders to find a major problem and rebuild the industry’s entire stack to solve it. In the words of Keith Rabois, “you start w[ith] a vision and insist on success.”

A growing number of startup success stories have bucked the overall trend that more capital raised is negatively correlated with VC returns and validated the fat startup approach. Rabois’s own company, Opendoor, which raised tens of millions of dollars with a vision but not an MVP, and eventually developed an entirely new stack of software to transform the home buying process, is perhaps the best example. Slack followed a similar trajectory, having raised at a $1B+ valuation while still in a private beta. The success of the fat startup, and the insistence by some, including Rabois, that, “the lean startup method is a guarantee of failure” can be cause for concern in universities where the lean approach is so widely adopted.

Can Students Build Fat Startups?

Before delving into this question, it’s worth noting that there are very successful entrepreneurs and investors on both sides of the lean vs. fat debate. A conversation between Ben Horowitz and Fred Wilson of USV highlights that point. But most proponents of the lean method would concede that some ideas (like Opendoor) are impossible to pursue without raising vast amounts of capital. This impacts students in a couple key ways. On the surface, an appetite among investors for bigger, costlier ideas is a good thing! It should open up a viable path forward for students with unique insights into large problems where lean entrepreneurship has not in the past. However, students generally don’t have the networks and reputations to raise tens of millions of dollars with a target problem but no fully-fledged solution, and an extended development cycle. Still, I see a few ways through which students can overcome that challenge.

First, rather than focusing on building bare-bones MVPs that validate demand at early-stages, student founders could instead look to build the first parts of a full-stack solution, thereby making progress towards a final product while showing investors their technical chops. Similarly, for products that involve overcoming a highly technical challenge, founders could focus on making progress on the hardest technical problems their fat startup will face rather than the easier aspects of the product, in the hopes investors will bet on true technological innovation in lieu of an MVP. Finally, perhaps there’s an opportunity of blend the two approaches by focusing on building an MVP and gaining some traction, and then leveraging that traction to raise money and rebuild the product in line with a more ambitious vision.

For us at WeissFund, understanding the challenges of building a fat startup can help guide our funding decisions. Rather than always placing an emphasis on building towards an MVP, we can look to fund companies going after moonshot ideas and following development cycles similar to those outlined above.

WeissFund is dedicated to funding, promoting, cultivating, and supporting student entrepreneurship in the UPenn community. Working on a startup? Interested in partnering? Want to get involved? Drop us a line at apply.innovationfund@gmail.com.

Dan Cahana is a senior studying Finance and Entrepreneurship. He has previously worked in growth equity at General Atlantic, where he will be returning after graduation, at Twine Labs (a WeissFund-backed company!) and at Jerusalem Venture Partners, and early-stage VC firm in Israel. His hobbies include tennis, travel, and optimistically predicting Eagles Super Bowls. Feel free to reach him at dcahana@wharton.upenn.edu.