Phat Startup VC

Lean Startups? I prefer mine Phat

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         $ to 1st Revenue      Goal

Starent            $30M                        Smartphones at 3G speeds 

Athenahealth   $13M                       Electronic medical records

Endeca            $30M                        Enterprise search/analytics

A123               $30M                       Electric cars

Aveo Pharma   $100M                     Cancer treatments

Equallogic       $30M                       Storage for virtual environments

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).

Be Bold

Over the last few weeks the blogosphere is buzzing with stories questioning whether there are too many startups being created and raising the possibility that many of these companies are going to have a hard time raising follow on capital. 

I think the bigger question is whether startups are focused on the right areas in the first place.

I was visiting with an MIT electrical engineering professor last week who was lamenting the fact that one of his best students had decided to discontinue their graduate work in favor of starting a new mobile apps company.  As the student described to him, “If I launch just one new app per month, and sell a few thousand each, I can make a decent living.”

Is this really how we want our best and brightest students and future entrepreneurs to be focused?

Who can blame them? With the advent of Amazon Web Services, smartphones and advanced development tools, it’s easier than ever to start a company and possibly make a quick buck.  Why not start one?  Everybody has ideas and maybe “mine” is the next big one.  Maybe I can flip it to Google or Facebook for a few million?

Given that most of these ideas come from “everyday living” rather than unique insight (described later), it is also very likely that many other people have the same or a very similar idea, or will copy your idea shortly thereafter.  Given the “winner take all” or “winner take most” nature of these businesses, the vast majority of these companies will fail.

In New England, we have a rich history of solving big problems — in life sciences, communications, infrastructure, software, robotics, wireless and energy.  We have the world’s best universities in our backyard.  We have access to real, disruptive technologies that can form the basis for big new companies. We have entrepreneurs who are experienced, providing them with unique insights based on working with customers everyday and understanding their problems.  These are not insights you gain in a dorm room, they are forged in the real world.

These are the opportunities that should have our focus.

There are many recent local example of companies in New England solving the bigger problems:  A123 Systems, Acme Packet, Starent Networks, Netezza, Endeca, Airvana, Equal Logic, 1366, QD Vision, Kiva, Hubspot, Arsenal, Actifio, DemandWare, Acquia, Carbonite, Zipcar.

Building these companies takes longer, they will take more capital, they may be harder — but when successful, they will create leading companies in new emerging markets. Don’t for a second think that there aren’t VC firms are looking for these opportunities.  We are.

The people who join these companies — young and old, novice and experienced, engineer and marketer will all benefit enormously and further prepare themselves with experience and unique insights for future entrepreneurial endeavors.

So be bold.  Zig when others Zag.  Solve an important problem that others a) wouldn’t know existed, b) wouldn’t know how to solve if they did, or c) wouldn’t have the guts to try.  This is the path to a successful entrepreneurial career and one that has strong prospects for happiness, fortune and for making a mark on the world.

That’s what we should be discussing.

There’s more to life than Angry Birds

Next wednesday, a group of leading local VC firms (North Bridge, Highland, Charles River, Matrix, General Catalyst, Battery, Spark, Castille) and the New England Venture Capital Association are hosting an informal networking event focused on The Cloud.  

Why?  Simply put, The Cloud will be the most important change in mobile, computing, storage and communications infrastructure of the next decade and its an enormous opportunity for Boston-area entrepreneurs.  Read these four facts:

Fact 1:  Mobile data growth is projected to grow exponentially over the next 5 years.  This is being driven by all of our iphones and android phones, ipads and data cards.

Fact 2:  Data center infrastructure and revenues will also grow like a rocket ship.  Everything is on-demand.  Every startup runs their infrastructure on Amazon EC2.  Enterprises will follow.

Fact 3:  VC Investments in Communications & Infrastructure over the last decade have dropped like a rock.  

To quote the legendary Andy Bechtolsheim, the founder of Sun; 

“The VCs just gave up on networking.”

So in the face of exponential growth in these infrastructure needs, there’s precious little innovation being pursued.  

Fact 4: Big companies don’t innovate, they rely on startups to solve their customers emerging needs. 

Have any of the following companies built anything truly revolutionary since their founding idea:

Cisco, Juniper, IBM, HP, Intel, Brocade, NetApp, EMC, et al.

So where will the necessary innovation to come from — the big ideas?  

Which makes the next decade a Golden Age for Cloud startups — those focused on communications and infrastructure, cloud services, management, support systems — there’s a complete imbalance between supply and demand.

So leave the flying birds, virtual farms and the 25th variant of some social, local, mobile service to the others, we’re going to come together to do what we do best - solve important, difficult, problems with unique, defensible innovations to make The Cloud happen in a big way.

Come join us on October 12th in Kendall Square.

Register below:

 http://www.cvent.com/d/2cqjqg/1Q