Startups: Like em Lean or Fat?

-By Stephen Fiedler

There is no prescribed guide or floor plan to building your startup. What works for Google, wont work for Zappos and vice versa. This is because the startup community is all about bringing something new or novel to the public. If it’s never been done before, how can you really take someone else’s advice on how to proceed?

So when you hear people start singing the praises of a lean startup, you might want to take it with a grain of salt. After all, “everything in moderation,” right? Startups and the startup environment constantly change, and what was “hot” a few years ago, may not be a best practice currently. In some cases, and especially among certain industries, a “fat” startup may better suit your developmental needs. The question is “how do I know when to go lean or go fat?” Well first you need to understand the theory and benefits of each:

Video Debate: Lean Vs. Fat Startups

The Lean Startup:

The Lean Startup is a term coined by entrepreneur and VC, Eric Reis, but speaks to the technological revolution in product development. The concept is simple: build up a bare-bones product as fast as possible and get it to market. Once there, customers will provide feedback and improvements–straight from the consumers mouth. Lean startups then take this customer feed back, reiterate and reconstitute/change their product to meet consumer demands, and relaunch an updated service or good. This process continues until the startup meets consumer demand and then a finalized product emerges.

The main purpose of lean startups are to create and produce products as quickly as possible. That way a product or service that someone needs is readily available and goes to market in it’s most rudimentary form, to see if people actually like and want the product. This way it removes any and all doubt about whether or not your million/billion dollar idea is really a dud.

Yet like everything in the startup community, a lean startup is a double edged sword. Sure it eliminates doubt about whether or not your product/service is wanted by consumers, but it also gets to you to stick your proverbial neck out, allowing competitors to see an unfinished product that they may or may not choose to steal, replicate and push out with added features. Plus, if you provide a good that is incomplete, consumers often will turn away from it, or seek more mature substitutes. This is wear Fat startups come into play:

The Fat Startup:

Fat startups in contrast are much more slower moving. They don’t rush launches or product development to the public because they want to provide a complete product with fixes and added functionality. In reality, startups only need two things (although they are biggies). The first is market dominance (“winning” over your competitors) and the second is financial capital. A lean startup while saving money and cutting costs doesn’t address the former, and only deals with the later. In contrast, a fat startup focuses on winning out in the market, and emphasizes the notion that if you build it, they will pay!

For more on the fat startup, check out this article written by Ben Horowitz (of the Venture firm Andreessen Horowitz) about the pros and cons of a fat startup. Just keep in mind that funding isn’t everything and that lean or fat, your startup must have a vision and the impetus to act on it.

2012: Year of the Financing

-By Stephen Fiedler

You may wonder why experts are so optimistic about 2012 and the economic turnaround when unemployment still rests at 8.6%, Europe is still mired in a debt crisis and Washington is just as deeply divided along partisan lines as it was before the Payroll Tax Cut showdown. While things do appear to be looking up, the US is still vulnerable. So why are we taking on a glass half full outlook? Because unlike the past few years, 2012 is the year of readily available financing. ‘Treps and investors rejoice!

The biggest threat of the ’07-’08 financial collapse was the ensuing credit crunch that nearly dried up all access to loans and lending markets the years following. Bad loans and bad borrowing had forced most banks and lenders to close their doors (if not go bankrupt) making it nearly impossible for startups and small businesses to get seed capital and later stage venture capital. As the numbers reflected during this time in a previous piece, VC State of Mind, venture capital and entrepreneurship in the US took one helluva hit. The recession didn’t just take away jobs, it took away the money that creates NEW jobs.

Rohit Arora, CEO of Biz2Credit, an online credit marketplace in New York that connects small and midsize businesses with lenders echoed these concerns stating that, “The lending market for small business in 2012 is going to be much better — the best year after the recession,” now that credit is more readily available. The chart below confirms this point:

But like everything worth doing, finding funding wont be easy for you young ‘Treps. “It is going to continue to be a fight and a struggle to get small business owners capital at fair prices,” says Ami Kassar, CEO of MultiFunding, a small-business lending consulting firm in Broad Axe, Pa. “It is going to take a long time for us to work our way through this situation.”

So here are some ways to get ahold of financing in 2012. While it may require more creativity on your part, embrace the new age of financing that once again is returning to the US. For more indepth article on specific types of funding, check out Goldilocks and the Three Funders. Otherwise here are the basics for financing in the New Year:

Crowd-sourcing:

More and more business owners and startups are turning to crowdfunding sites, such Kickstarter, IndieGoGo and RocketHub, to raise small amounts of money from large pools of investors–especially if the Securities and Exchange Commission eases rules on such transactions (they are expected to do so to encourage VC in the US). Kickstarter alone has raised than $125 million in pledges since its inception in April 2009. One business raised almost $1 million from more than 13,500 backers in December of 2010, setting a crowd-sourcing record.

Crowd-sourcing isn’t ideal, and can often pull your company and creative ideas in many different directions, but when capital and credit are tight, this is often the only avenue a startup has in the initial stages. It’s a good launching pad, but for those million dollar ideas, they are just one step in a long line of funders, angels and VCs.

Community Bank Loans:

The collective bank loan balances of small businesses have fallen more than 10% over the past four years to $610 billion in June of 2011 from $681 billion in June of 2007, according to FDIC data compiled by Kassar of Multifunding. That’s pretty bad and speaks directly to the startup/small business credit crunch. I know, I know, the same clowns that cause the Financial Crisis, after being bailed out by US tax payers can’t give that same money back to an aspiring entrepreneur with a billion dollar idea? Yeah well that’s the world we live in. Fortunately there’s a workaround.

While large banks sharply cut lending to small businesses, community banks are actually providing more loans. Since 2007, small-business loan volume at small banks grew by $17 billion to $302 billion, as of June 2011. If you want access to good loans and good credit at fair prices (plus the knowledge you aren’t leaving your money with crooks) this is the way to go. It’s the new “micro-loan” and it’s gaining momentum in the US.

Small Business Administration (SBA) loans: 

SBA lending reached the highest level ever in its fiscal year 2011, which ended Sept. 30. The SBA backed 61,689 loans totaling $30.5 billion, a big jump from the 50,830 loans totaling $17.9 billion two years earlier. Risk-averse banks may prefer making SBA loans because the government guarantees as much as 85 percent of the loan in the event of default. It’s a safe bet and the risk-aversion helps your cause in the short term. However, long-term these SBA loans can hinder progress and development. This is your “safest” bet.

Asset-backed lending: 

Asset-backed loans, which are based on the value of collateral, have become increasingly popular among the startup world. Although they are often more expensive than a regular bank loan, businesses often turn to asset-backed lenders when they don’t have the track record to qualify for a traditional line of credit.

In the third quarter of 2011, businesses were making greater use of their asset-backed credit lines, with 40.5 percent in use compared with 37.2 percent a year earlier, according to a survey of members of the industry group Commercial Finance Association. That marked the third consecutive quarter of increased utilization of credit lines. For a piece explaining asset-backed loans, check out When to Issue Equity over Debt.

Hopefully you’ll be able to use these new forms of financing for 2012 and beyond. Go forth and get funding! Here’s to 2012!