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Over the last several weeks, there have been erroneous reports in the press that my partner Jeff Jordan and/or I might become an operating executive of Yahoo in some capacity.

To be crystal clear, neither Jeff, nor I, nor any of our partners at Andreessen Horowitz, are in the running for, or would accept, any operating role at Yahoo, including CEO, acting CEO, chairman, or executive chairman.

Jeff and I have high regard for Yahoo, but we are fully committed to our day jobs as general partners at Andreessen Horowitz and board members of our portfolio companies.

[This post is by Ben Horowitz.]

Fred Wilson wrote a counter post to my The Case for the Fat
Startup
that you can find here. Before countering his counter, I’d like to say
that Fred is one of my favorite VCs and has a marvelous track record of
success. Further, I’d like to thank Fred for posting his article, as it enables me to
clarify a couple of subtle but important points. 

I actually agree with Fred in the base case and never said
otherwise: entrepreneurs should build the product that everybody wants before
raising a boatload of cash to build the company. But Fred says one thing that
is confusing and another that’s just not accurate:

  • Only
    raise a boatload of cash once you’ve achieved product market fit.
    Product
    market fit isn’t a one-time, discrete point in time that announces itself with trumpet
    fanfares. Competitors arrive, markets segment and evolve, and stuff happens—all
    of which often make it hard to know you’re headed in the right direction before
    jamming down on the accelerator.
  • Only Marc
    and I could have pulled off the Loudcloud/Opsware miracle; other entrepreneurs
    shouldn’t even try.
     We
    certainly didn’t script the movie the way it turned out. I’m not recommending
    that you as an entrepreneur pattern your own startup after mine. But as an entrepreneur,
    you have to deal with adversity, as we did with Loudcloud/Opsware.
    My experiences there are highly relevant to other entrepreneurs. In fact, they
    are more relevant than Fred’s pattern matching.

Let’s talk about each point in turn.

Product Market Fit Myths

First, I agree that the best way to build a big company
would be to find product market fit and then raise a bunch of money to build a
big business. But sometimes, things aren’t so clear. Let me try to describe
some of the ways things can get messy as a series of myths about product market
fit.

Myth #1: Product market fit is always a discrete, big bang event

Some companies achieve primary product market fit in one big bang.
Most don’t, instead getting there through partial fits, a few false alarms, and
a big dollop of perseverance. By the time it got acquired, Opware had achieved
product market fit for a category of software called data center automation.
But it wasn’t at all obvious that was going to be our destination while we were getting there. We actually achieved product market fit in a number of smaller
sub-markets such Unix server automation for service providers, then Unix server
automation for enterprise data centers, then Windows server automation, and
eventually network automation and process automation. Along the way, we also built a few products that
never found product market fit. 

Similarly, Joel Spolsky of Joel on Software and
Fog Creek Software fame has an exciting new company called Stack Overflow. He has
achieved product market fit in the collaboratively edited Q&A market for audiences such as software engineers and mathematicians.
Is this the primary product market fit? Neither of those markets seem that big.
Will he need significant new features to find the big product market fit?
Probably. Should he invest or stay lean? Good question, and there’s no formulaic
answer.

Myth #2: It’s
patently obvious when you have product market fit

I am sure that Twitter knew when it
achieved product market fit, but it’s far murkier for most startups. How many customers (or site visits or
monthly active uniques or booked revenue dollars, etc.) must you have to prove
the point? As I explain above, there may be multiple sub-markets, each of which
need their own product. I show below that Fred himself didn’t realize that
Loudcloud had achieved product market fit even though we had. It’s usually not
black and white.

Or let's try a consumer products example. Apple's first iPod shipped in
November 2001. It took nearly two years (91 weeks, to be precise) to sell its first million units. In
contrast, Apple's iPhone 3GS shipped June 2009 and shipped 1M units in 3 days. At what point is it obvious to the original iPod team that they've achieved product market fit?

Myth #3: Once you achieve product market fit, you can’t lose it.

Fred implies that we raised a boatload of money for Loudcloud prior to achieving product market fit. This is not true. Four months after founding Loudcloud, we had already booked $12M in customer contracts, so we had product market fit by most measures. I’d defy any VC including Fred to point to a company with a $36M run rate 4 months after founding where the VC advised, “stay lean until you achieve product market
fit.”

But after that bolt out of the starting gate, the market for cloud
services changed dramatically. After Exodus went bankrupt in September 2001, the market for cloud
services from semi-viable companies went to zero and we lost product market
fit as a cloud services provider. We had to rebuild completely and would ultimately find product market fit in a different set of markets altogether.

Myth #4: Once
you have product-market fit, you don’t have to sweat the competition.

It’s
fine to stay lean if you are not quite sure that you have product market fit
and there are no competitors in your face every day. But usually there are. In fact, the best markets are usually the ones in which competition is fierce because the opportunity is big. How
long should you stay lean before attacking? Again, there is no formula that works in all (or even most) cases.

Exceptions that prove the rule

Now, there are some companies such as Twitter (one of Fred’s brilliant investments) for which the above myths are actual truths. However, I propose that
Twitter is more exceptional than Loudcloud or Opsware in that most
entrepreneurs are dealing with a situation that looks much more like Opsware
than Twitter.

The Marc and Ben Special

Second, let's talk about the Marc and Ben Special. Fred writes: “Ben explains that Loudcloud raised $350mm in four rounds of financing (including an IPO) in the first 15 months of
its life. Marc Andreessen and Ben Horowitz can do that. Most of you can not.”

It's true that we raised a lot of money, and not all first-time entrepreneurs can raise that much money. But that's not my point. The most important fund raising that we did as it relates to The Case for the Fat
Startup
was the very last round (as is very clear in the original post). We
raised that money as Opsware, long after we had lost all of our
magic fairy dust. Marc had moved on to found Ning and I was the CEO who nearly
ran Loudcloud into the wall. I am quite sure that I did not have exceptional
fund raising capabilities at that point.

In summary, let me repeat that I agree with Fred in the base case: first build
the product that everybody wants, then raise enough money to build the company. If you can build a big company that way, by all means do it.

Having said that, your story will almost certainly not be that
clean. You might achieve partial product market fit at the same time as a scary
competitor, you might not be sure that you have product market fit, you might
lose product market fit. When one or more things happen, no pattern matching will save you. You will have to figure out for your own unique situation a)
whether there is a clear and present market and b) if there is, how you can
take it.

Fred implies that what we did at Loudcloud/Opsware was
extremely difficult and while Marc and I could pull it off, other entrepreneurs
shouldn’t try it. My point is that trying it isn’t really a choice. As an entrepreneur, you will sometimes (maybe more often than you like) find yourself in a difficult situation. I hope to have provided some
insight on how you might come out alive when that happens.

These days, nearly all the entrepreneurs who come pitch at our venture firm Andreessen Horowitz highlight how little money they are raising and how "lean" they are planning to run the company. While we don't want to invest a single dollar more than a company needs, there is a case to be made for raising enough money to win the market. 

My partner Ben makes this case convincingly in his guest post on AllThingsD titled "The Case for the Fat Startup." Read it, and along the way you'll also hear the story of how Ben navigated our company Opsware through the turbulent dot-com implosion to a $1.6 billion acquisition by HP Software in July 2007. 

Hint: he didn't do it running lean.

Hot off the virtual press: my partner Ben has posted a great essay on leadership over at TechCrunch.

The post should be of particular interest to entrepreneurs who are raising money from our venture fund, as Ben articulates the three key traits we look for in the leaders of the startups we fund. 

Bonus feature: in the post, you'll learn what we like best about three Silicon Valley icons: Steve Jobs, Bill Campbell, and Andy Grove. 

My partner Ben Horowitz and I are delighted to announce the formation of our new venture capital firm, Andreessen Horowitz, and our first fund — $300 million in size — aimed purely at investing in the best new entrepreneurs, products, and companies in the technology industry.

Between the two of us, Ben and I have started three companies directly, created many new products and services, run operating businesses at high levels of scale, angel invested in 45 tech startups in the last five years, and served on a broad cross-section of company boards with some of the best entrepreneurs and investors in the industry. Through all this, we have worked closely together for 15 years, and we could not be more excited to extend our partnership into venture capital.

In undertaking this new mission, our core principles include:

  • Technology and its advancement is absolutely central to human progress. Entrepreneurs who create new technologies and technology companies are improving the standard of living of people worldwide and unlocking amazing new levels of human potential.
  •  

  • While broad investor psychology whips wildly between euphoria and depression, technology change not only continues but is accelerating. In fact, we believe that technology change cascades — each new generation of technology contains within it the seeds for even more profound advances to come. And, technology change creates continuous opportunity to build important and valuable new companies.
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  • A technology startup is all about the entrepreneurial team and their vision. Our job as venture capitalists is primarily to support entrepreneurs by helping them build great companies around their ideas.
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  • The process of building a new technology company is changing rapidly. For example, many of the best new technology companies require far less money up front to build the first product, but far more money later to scale into today’s enormous global market, as compared to historical norms. We intend to not only embrace these changes but drive them forward as hard as we can.
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  • Building a great company is a team sport — including the selection of the best possible set of investors and advisors for a specific opportunity. We have been lucky enough to work with many of the industry’s best investors, advisors, mentors, and coaches over the last 15 years, and we look forward to continuing to be a great partner to all of them.
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  • Trust is essential to building a great company. Trust requires the highest standard of ethical conduct, which we will strive hard to achieve and maintain.
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  • While there are many exciting new entrepreneurial opportunities in fields like energy and transportation, there continues to be gigantic opportunity in information technology — which is where we will focus.
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  • And, while there are many extremely bright and capable entrepreneurs all over the world, there continues to be a special magic to Silicon Valley — which is where we will focus.
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We will hang our hat as a firm on the fact that both of us have extensive direct entrepreneurial and operating experience. We have built companies, from scratch, to high scale — thousands of employees and hundreds of millions of dollars of annual revenue. In short, we have done it ourselves. And we are building our firm to be the firm we would want to work with as entrepreneurs ourselves.

Here are some more specifics about how we will operate:

  • We have the ability to invest between $50 thousand and $50 million in a company, depending on the stage and the opportunity. We plan to aggressively participate in funding brand new startups with seed-stage investments that will often be in the hundreds of thousands of dollars. But we will also invest in venture stage and late stage rounds of high-growth companies.
  •  

  • We also have the ability to participate in a variety of investment structures, including but not limited to buying founder shares, investing in public stocks, and contributing to leveraged buyouts. We do not have a goal to do any of these things specifically, but rather we will be maximally flexible to suit our investing strategy to the opportunity.
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  • Ben and I will be the only General Partners in the firm, at least to start. We may add a small number of additional General Partners in the future, but we are not assuming that will be the case. We will also build a professional staff to support us in our efforts and to help our portfolio companies in various ways. However, we will not have associates or other General Partner-track junior positions.
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  • Ben and I will go on boards of companies in cases where we are investing serious money — generally, $5 million or more, although there could be exceptions in both directions. We will generally not go on boards of raw startups — in fact, in many cases, we don’t even think today’s raw startups should have boards.
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Here are some more specifics about what kinds of entrepreneurs and companies we are looking for:

  • Above all else, we are looking for the brilliant and motivated entrepreneur or entrepreneurial team with a clear vision of what they want to build and how they will create or attack a big market. We cannot substitute for entrepreneurial vision and drive, but we can help such entrepreneurs build great companies around their ideas.
  •  

  • We are hugely in favor of the technical founder. We will generally focus on companies started by strong technologists who know exactly what they want to build and how they are going to build it.
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  • We are hugely in favor of the founder who intends to be CEO. Not all founders can become great CEOs, but most of the great companies in our industry were run by a founder for a long period of time, often decades, and we believe that pattern will continue. We cannot guarantee that a founder can be a great CEO, but we can help that founder develop the skills necessary to reach his or her full CEO potential.
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  • We believe that the product is the heart of any technology company. The company gets built around the product. Therefore, we believe it is critical that we as investors understand the product. We are ourselves computer scientists and information technologists by experience and training; therefore, we plan to focus on products in the domain of computer science and information technology.
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  • Here are some of the areas we consider within our investment domain today: consumer Internet, business Internet (cloud computing, “software as a service”), mobile software and services, software-powered consumer electronics, infrastructure and applications software, networking, storage, databases, and other back-end systems. Across all of these categories, we are completely unafraid of all of the new business models — we believe that many vibrant new forms of information technology are expressing themselves into markets in entirely new ways.
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  • We are almost certainly not an appropriate investor for any of the following domains: “clean”, “green”, energy, transportation, life sciences (biotech, drug design, medical devices), nanotech, movie production companies, consumer retail, electric cars, rocket ships, space elevators. We do not have the first clue about any of these fields.
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  • We are primarily but not entirely focused on investing in Silicon Valley firms. We do not think it is an accident that Google is in Mountain View, Facebook is in Palo Alto, and Twitter is in San Francisco. We also think that venture capital is a high touch activity that lends itself to geographic proximity, and our only office will be in Silicon Valley. That said, we will happily invest in exceptional companies wherever they are.
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Finally, one personal note — my role as an active Chairman of Ning will continue unchanged, along with my board roles at Facebook and eBay.

If you have read this far, thank you very much for your interest in our new firm — we will keep you updated over the months and years to come by blog!