The ongoing debate between Fred Wilson (likes lean, "capital efficient" startups) and Ben Horowitz (thinks you should raise big money to go after big opportunities) was nicely summarized on GigaOm here. I think it is relevant for many of our readers, who run software-based businesses.
The case for lean / capital-efficient
"Lean" is much better for founders. It's a huge amount of work to build a lean or bootstrapped company - the opposite of a "lifestyle" operation. But, as Wilson notes, you end up with a bigger stake and a much higher probability of making money.
In an investor-funded businesses, the original founder usually does not make much money. You will often see statistics from VC firms showing that they make money on 10% to 50% of their deals, depending on how big the gain needs to be to be "making money". I have never seen a similar statistic that showed the percentage of deals that make money for the original founders. That statistic is much smaller. They wouldn't want you to see it. Big wins are well under 10%.
How does this happen? If you have a company that proceeds from its first investment to an exit without ever having a down round, the founder will make money. The fabulously wealthy silicon valley founders that you hear about had this type of good fortune. However, the average VC-funded startup now takes about 8 years to reach an exit. In that much time, even a strong company will have some random walks down. That wipes out the founders. VC term sheets are designed to take advantage of this type of ratchet, and VC's depend on it.
On the other hand, most bootstrapped businesses eventually find a way to make money for their founders, and it seems like the probability of founders making money falls when they need more investment.
So, if you want to make money, go lean. If you are founder or early shareholder, that is all you need to know. You can stop reading now. Read on only if you are curious about the other side of the argument.
The case for FAT
You can innovate without spending money, but you will be innovating within a very limited range. Does the world need another little Web service? There are a lot of things that are just expensive. These are the big, society changing innovations. Without significant investment, you won't be building a new kind of semiconductor, or replacing oil with algae, or sending a man to the moon. If you spend money, you can do more, and you can be more innovative.
The changing debate
It's a new phenomenon to see Fred Wilson and other VC's stand up for lean and capital-efficient. Investors sell money. Their job is to get the best price for money by finding investments that need a lot of money and are desperate for it. Lean goes against their interests. And, in fact, I have heard VC's like Robert Metcalf dismiss companies with "it's capital efficient" as words of utter contempt. I searched on google for "Capital efficient" one year ago, and the top hits were all investors who agree with Horowitz, that capital efficient = trivial. Times change. Now, you find articles with titles like "The gift of capital efficiency.". I think this change is driven by statistics. As Wilson notes, capital efficient companies are making more money and better returns.
So, which way am I voting? I am a founder, and I want to make money for my own family. I run one of the most capital efficient startups you are likely to find anywhere. We have basically no costs beyond contract labor. I work alone at a $15 desk. In my last startup I raised venture capital, had a big office and a sales force and a receptionist. Although the company was successful, I got a cramdown that rendered my stake worthless. That company was less profitable, less able to support my family, and interestingly, less able to fund new directions, because anything it did was more expensive.
However, I think that the trend to efficiency, while good for me because I can deliver efficiency, does indicate a sickness and lack of innovation in our economy. If most of the money is being made by people who work within the narrow bounds of efficient operations, it means that big innovations aren't paying off. That's why VC returns are so crappy. That's why our economy isn't growing. That's why we are looking to efficiency. There aren't enough big innovations that are succeeding. Have we run out of opportunities?
This isn't just a discussion for small companies and startups. This is a huge issue in the global economy that affects billions of people. Those people are saving for retirement. They need a much higher return on investment. They are driving interest rates to zero. They are bidding up stocks until they can't go up any further. They are funding huge government deficits. They are desperate for better returns, which they are not finding.
It will seem to a startup founder that capital is hard to get, but the reality is the opposite. Startups can't get funded because, statistically, they don't make much money. They don't make much money because the big innovations are scarce at the moment. If you can fix that problem, there are trillions of dollars out there begging to get in to your deal.