Ben Horowitz of Andreessen Horowitz and Opsware fame recently made a post in the Wall Street Journal about why sometimes companies need a lot of funding to win a market.
Here is a brief summary of Loudcloud/Opsware’s fund-raising history during that time:
- September 1999: Loudcloud founded
- November 1999: Loudcloud raises $21 million at a $45 million pre-money valuation (Benchmark Capital is the lead investor)
- January 2000: Loudcloud borrows $45 million from Morgan Stanley (MS)
- June 2000: Loudcloud raises $120M at a $700M pre-money valuation
- March 2001: Loudcloud goes public on Nasdaq, raises $160 million and is valued in the public markets at approximately $480 million. Total funds raised to this point: $346 million.
- August 2002: Loudcloud sells the managed services business to EDS (this was the only actual business we had at the time) for $63.5 million and becomes a software company (and changes its name to Opsware).
- September 2002: Opsware shares trade for 35 cents per share or approximately a $28 million market cap.
- September 2007: Hewlett-Packard (HPQ) acquires Opsware for $1.6 billion
The glaring issue I see here is that there were big winners and big “losers” in this deal and that isn’t sustainable. In fact it is the reason that the venture industry has failed to perform.
If you do a very rough back of the envelope calculation:
Benchmark: Invested $21M for 32%
Follow-on Investors: Invested $120M for 15%
There was 33% dilution at IPO.
Net return for Benchmark after dilution (32% x (1-15%) x (1-33%)) x $1.6B was $290M or about 14x their original investment. The investment was held for 8 years, so not a bad investment for Benchmark.
The follow on investors did not fair as well. Their return after dilution (15% x (1-33%) x $1.6B) was $160M or about 1.3x. Their investment was held for 7 years, which in effect means they barely got their money back.
Mark Andreessen walked away with $138M.
The world Ben Horowitz is talking about has disappeared and dragging back these examples only serves to point out further why venture firms should not be thinking in this way. Ben probably views himself as a “Benchmark” and not a “follow-on investor” – and he probably is, but those “follow-on investors” are fewer and farther between. They have learnt lessons and changed their ways, or they haven’t been able to raise follow on funds.
There is no one left to rescue the fat start-up.
by Michael Lewkowitz
Lean works particularly well when the win isn’t about technology, it’s about design. You’re right about the dynamics of the venture market right now and the context of many lean micro-ventures are a more likely road to success. Like with any ‘way’ though there is no one right answer. In the Opsware case they had painted themselves in a box, so the path they took was the best they could have. Lean would have failed them.
In all ventures, you have to know what the key lever for your business is and you have to drive that to the end. In some businesses, like social web apps, it’s not something that’s expensive. In other spaces, that’s not the case. If your lever is your R&D or proprietary low-cost manufacturing for example,you have to invest in it to win.
Knowing your levers and focusing like hell on them is what is compatible with both ‘lean’ and ‘fat.
Now back to my ‘lean’ startup.
by Mark MacLeod
I think there is room for a handful of “fat” startups. Each decade seems to have one or two. Think: Google, Salesforce, Cisco, etc, etc. Force 10 Networks more recently. Don’t think you can base a fund strategy around them, but they have a place.
In the overall ecosystem, smaller investments with everyone making more modest wins is a better and more sustainable formula in my books