
Could VC be a Casualty of the Recession? - mqt
http://www.paulgraham.com/divergence.html
======
JeffJenkins
The startup I work for just hit profitability and we're basically giving up on
funding. The offers that we were getting weren't good enough. We'll grow
slower, but we won't get dilution unless it's really worth it.

What I'm curious about is that I thought the purpose of VC was not just to
stay in business, but to grow _fast_. I'm pretty sure PG said in a previous
essay or comment that if you skip out on VC and someone else takes it you can
get overtaken or not be able to catch up to the market leader.

~~~
pg
It's true that it can be dangerous not to take VC if your competition takes
it. But it's not so dangerous if the reason you don't take it is that VCs are
saying no to everyone, because that implies your competitors are also less
likely to get it.

~~~
JeffJenkins
Yes, but the question the essay is setting out to answer is: what happens when
the VCs recover?

I think one of the last points I need to buy into the essay is that it isn't
just the starting up costs which have gone down. The commoditization of
computing in the cloud means that as long as you're profitable on a per-user
basis the cost of scaling is also way down (although the amortized cost might
be up).

The other danger is not being able to hire enough of the right people, but the
number of people necessary does seem to be going down as the tools get better.
The startup I'm working for has just decided to stop looking for funding and
do our hiring more slowly over the next year, so I suppose we're a part of
that trend.

~~~
iamelgringo
_Yes, but the question the essay is setting out to answer is: what happens
when the VCs recover?_

I've been thinking about this a lot recently. I think that the answer is, that
VC's aren't going to be able to fund web based software startups as much. We
just don't need the money.

Who does need the money? Green Tech, Biotech, hardware/embeded, enterprise
software. Those companies can use the capital and might actually be willing to
jump through the hoops necessary to IPO. VC's only really get paid off when
companies IPO or get acquired for huge sums of money.

I think that this is going to be a water shed in Silicon Valley culture. One
of the reasons that there are so many software engineers in the Valley, is
because there have been a lot of VC funded startups and jobs since the first
bubble in the 90's.

VC money is going to start chasing different kinds of companies, which means
more green tech, biotech and hardware/embeded, enterprise software jobs. That
means more electrical, genetic and chemical engineers and less software
engineers in the area.

------
aneesh
_"we got a record number, up 40% from the same cycle a year before."_

I agreed with much of this article, but not that line. A lot more people have
heard of YCombinator since a year ago, so all else equal, you'd _expect_
applications to rise over that period. So comparing the number of apps with
the corresponding value from a year ago isn't a fair comparison.

Indeed, looking at
<http://siteanalytics.compete.com/ycombinator.com/?metric=uv> we see that the
number of unique visitors to ycombinator.com is up 3x from a year ago. But
applications are only up 40%. To be fair, we probably can't expect
applications to grow 3x since many of those visitors are international, or
otherwise unlikely to apply to YC. But to make the statement pg wants to make,
I think we need a better metric than raw growth in applications.

~~~
pg
Perhaps I should have added that 40% was more than applications usually go up
year to year.

I'm pretty sure, based on conversations with founders, that this spike in
applications wasn't due to people learning of our existence for the first
time. Most people we interviewed seemed to have known about us for a while.

I don't think application numbers are much correlated with News.YC traffic
either. I think most people who come here are just looking for what people
found at Reddit 3 years ago.

~~~
robg
Wasn't it also the first cycle where "Startup Ideas We'd Like to Fund" came
into play? That seems like a giant roadmap for anyone who may have heard about
YC and never seriously considered it before.

I guess the test is: Were the pitches clustering more around those ideas?

~~~
robg
I realized that might be a difficult question to answer.

One more test I can think of: If, as expected, the recession is still
bottoming at the Spring deadline then the numbers (gross or percent change)
should be comparable if that craziness is driving folks, in swarms it seems,
to the founder path. However, if it was "Startup Ideas...", then, as a
singular event, the growth should be closer to a normal rate if not an overall
decline in gross from the Winter.

Care to make a guess which way it will go?

------
startingup
I would like to believe Paul's thesis, but in the back of my mind, why do I
get the feeling "He is trying to scare investors into putting money"?!

Seriously, I think over-supply of start-ups will crash prices. Yes, there is
no limit to wealth creation, but even so, it is easy to upper-bound wealth
creation over, say, the next 5 years. We can say with confidence there won't
be more than, say, $10 billion worth of web start-up acquisitions over the
next 5 years (in total, not per year) - that was about the total in the last 5
I would estimate and I think I am being fairly optimistic here. Even that $10
billion would be parceled out in the 80-20 rule - a couple of YouTube home
runs, a few singles and doubles, and the remaining mass of start-ups have to
fight over a fairly small pot of gold.

My objection is consistent with economic theory: over-supply leads to serious
price crashes, even when you make the favorable assumption (which is not
exactly true in the start-up case) that in the long run, the over-supply can
be absorbed.

~~~
pg
If I were motivated only by self-interest, I should want later stage investors
to drop out. That would leave seed stage investors like YC as the only game in
town.

And incidentally, I don't see why it's easy to upper bound wealth creation
over any time period. If everyone woke up tomorrow and started working twice
as hard, what would limit their output?

~~~
calambrac
Why would you want later stage investors to drop out? You have early, cheap
equity; don't later stage investors reset the valuation and give you a shot at
cashing out if you want? (I really don't know, I'm actually asking).

~~~
pg
The valuation goes up between us and a series A round, but in a successful
startup it should go up much more afterward.

~~~
calambrac
How many companies that get a series A round end up being successful? It seems
like having that opportunity to decide if you agree that the company will keep
growing or that you've made enough and would rather reinvest in the next round
of startups would be nice to have.

~~~
pg
It wouldn't be nice to the startups to do that, because it would send an
alarming signal to the series A investors that would drive down the valuation
and maybe even prevent the round from closing.

------
preview
This is an interesting perspective, but it seems to be (potentially) true of
one class of startup, but there are many others, requiring much large amounts
of money to start, that will still rely on VC funding.

Software startups, specifically web startups, have been a favorite of VCs (for
good reasons). If those startups no longer seek VC funding, will it trigger a
renaissance in funding for other startup classes (e.g. semiconductors or
hardware)?

~~~
wheels
Biotech, greentech and embedded systems are a few areas that look poised to
keep growing and need a more significant amount of capitalization to get off
of the ground.

~~~
drwh0
but greentech will require more funding per instance than any VC firm will be
able or willing to put up. show me the VC firm that is going to put over $1
billion into any single investment...when it comes to nuclear or hydrogen, a
billion might only bootstrap the company. these industries are going to need
massive amounts of funding. only one entity can do it - uncle sam, DARPA and
the DOE

~~~
blurry
If you believe Al Gore, for $90MM you can build a giant New Mexico wind/solar
farm that would supply enough electricity to power the entire US. (It's been a
while since I saw the presentation so some details might be wrong but I am at
least in the ballpark, especially regarding the price tag). Seems like 10 VC
firms could easily get that sort of money together.

~~~
helveticaman
90 Million? The entire US? That's way off. I haven't seen the numbers, but
that's like saying a car engine can get 1500% efficiency, or that a ten-year-
old neighbor can bench-press 2000 pounds. It's just not in the cards.

~~~
gaius
"If you believe Al Gore" being the key phrase :-P

------
rgr
I agree with Paul's point, but it seems like the flip side of the equation is
that most startups these days don't have the kind of big exits that internet
giants like Amazon, Ebay, Yahoo and Google had (or even the mass market
penetration that MySpace and Facebook have gotten for that matter). If a these
new startups truly had the potential to capture huge markets, they _would_
need the funding, because 3 guys in an apartment simply can't go after a $5bil
opportunity. I think the phenomenon Paul describes is the result of 2 trends,
not just one: 1) it's cheaper to start companies and 2) most startups are
going after small markets (or whatever is left from big markets that bigger
companies have already captured).

------
tc
Wealth is created when people take existing resources and transform them into
something of higher value. Money is simply one very liquid type of input that
a creative entrepreneur can use to create wealth.

If the marginal value of more investor capital to web entrepreneurs falls
below the cost of acquiring and managing investors, then predictably web
entrepreneurs will stop seeking capital. A more interesting insight, though,
is that long before things get to that point, smart investors should be
seeking to deploy their capital to ventures that can actually use the money to
produce a better return. If capital is no longer the limiting reagent in web
startups, then the money should go to places where money is the limiting
reagent, and consequently has a higher value.

It's worth noting that Kleiner Perkins, as one data point, got out of the web
startup business some time ago and has been investing in energy and biotech.

~~~
brianr
_It's worth noting that Kleiner Perkins, as one data point, got out of the web
startup business some time ago_

That may be their PR, but they're very much still investing in web startups.
Here's a list of their investments: [http://www.crunchbase.com/financial-
organization/kleiner-per...](http://www.crunchbase.com/financial-
organization/kleiner-perkins-caufield-byers)

------
numair
Completely, totally agree. I was just discussing this today with my business
partner; I think that many people won't even know what to do with extra money
if it is given to them. That's never happened before - there's always been the
"well, we could use more servers" or "well, we could always hire more
engineers" argument. Today, I think a lot of people are beginning to realize
that 1) if you engineer your applications properly, and on the right
platforms, you can scale your server demands along with your
userbase/revenues; 2) more engineering/other assorted human capital won't
necessary translate into better, more usable product.

I personally believe this is the beginning of a massive shift, and one that
isn't even tied to the economy - but, of course, will be dramatically
accelerated as a result of it. On the point of what happens to the startup
community, however - I think it will be a lot harder to start a me-too company
and get any traction; as a result, even with the lower cost of business, there
will be fewer people able to enjoy the benefits. It's sort of like the rest of
the economy - if you are the absolute best at what you do, it's a great time
to be in business; for everyone else, the situation is precarious. Running on
$3000 a month is great, but not if that means you're losing $3000 a month with
no foreseeable way of recouping your investment.

Perhaps that's where the VCs will step in - sweep those flailing enterprises
under their wings, pump greater capital/human resources into them, and try to
brute-force them into successful enterprises. In effect, they would become the
startup version of their private-equity peers; not a bad place to be, but
again - the best will survive, the rest will die.

~~~
Dilpil
Interesting. I wonder if, 10 years from now, VC will simply be high tech
private equity?

~~~
shimon
I don't think this is likely, because turning a kind-of-flawed tech business
into a good tech business usually (though not always) requires a lot of
technical work. I could imagine a collaboration between VCs and hackers,
though, or just a group of savvy hackers, taking on this kind of role.
Basically a larger-scale version of going around to my friends and saying "I
think doing X would make your company better and I'll do it for 10%."

------
comatose_kid
Paul - Assume that

1) your thesis is correct, and,

2) that a good startup hub is created primarily though the availability of
investors (as observed in the essay "The Hacker's Guide to Investors"),

Don't these two things imply that Silicon Valley's prominence as a startup hub
will wane?

~~~
pg
No. First of all, SV doesn't depend only on investors. All the support for
startups is here, from lawyers to graphic design to (probably most important)
other founders.

Second, not taking VC doesn't mean not taking investment. If startups
downshift, the next lower gear is angels.

~~~
BerislavLopac
What if angels are few and far between, and those that are there lack any
experience about angel investing?

------
mattmaroon
"The reason startups no longer depend so much on VCs is one that everyone in
the startup business knows by now: it has gotten much cheaper to start a
startup. "

Maybe I'm biased because I was in YC and it was mostly first-timers, but most
of us don't even remember a time when it was a lot pricier.

------
mattmaroon
You've been unusually prolific lately.

~~~
jgrahamc
Maybe we're just seeing a buffer being flushed. He may have worked on all this
stuff earlier.

~~~
pg
Partly. "High-Res" and "Artists Ship" were both things I started during the
summer and didn't have time to work on again till after interviews. This last
one I wrote a month ago and then had to sit on because it was supposed to
appear in a print report.

I actually forgot about "Artists Ship." Then a few days ago I was talking to
Paul Buchheit and he mentioned how great it was to be able to release code
instantly at Friendfeed, compared to the delays he had at GMail. As we talked
about the question I had this weird sense of deja vu, so I went home and
looked around my hard drive, and sure enough there was this nearly finished
essay. The write date was Aug 11, so I must have started it just before Demo
Day and then forgotten it during the ensuing bustle.

~~~
ph0rque
Can you tell what kind of company commissioned or requested this essay? I'd
speculate it was one of the top VC firms...

------
prakash
_The current generation of founders want to raise money from VCs, and Sequoia
specifically, because Larry and Sergey took money from VCs, and Sequoia
specifically._

Excluding YC and the likes, I would have thought, by now, a lot of startups
would want to raise money from angels that have formerly started startups --
there are tons of them around. That would be the #1 choice.

#2 choice would be the Founders Fund, Union Square Ventures, First Round
Capital, Atomico, Ambient Sound Investments and the like.

Failing these, the #3 would be the Sequoia's, KPCB, Khosla Ventures,
Benchmark, Accel's, Menlo's of the world.

What do folks on HN think?

~~~
shafqat
Agree 100%. Although we were talking to some of the VCs in your 2nd bucket, we
ended up going with #1. Our seed round is entirely angel funded, with one
institutional player (#3 type) making an exceptional angel investment.

------
bokonist
I think pg's right in regards to web startups. The only role I see for VC is
in scaling sales and marketing. If you get your business to a point where you
can spend $10 million on sales and marketing and turn it into $30 million,
then taking VC makes a lot of sense. It gives you a lot of extra leverage.

I do hope VC thrives in other sectors - clean energy, hardware, automobiles,
biotech - etc. If Kleiners-Perkins can make money off its CleanTech
investments, the world will be a vastly better place.

~~~
netcan
That's a fundamentally different kind of investor.

------
HealyJones
This post reminds me of a post I made a while ago called Don't Raise Venture
Capital. [http://www.startable.com/2008/09/26/dont-raise-venture-
capit...](http://www.startable.com/2008/09/26/dont-raise-venture-capital/)
This may seem a bit odd, as I am a VC. My point was not 100% aligned with
Paul's, as he's suggesting something a bit more extreme, but there is a
similar point - these days you can build a good business without significant
funding. And you are potentially better off not raising any venture capital.
Although I hope the venture business hasn’t become totally obsolete, as I
really enjoy spending time with entrepreneurs!!

------
rokhayakebe
PG is spoiling us with great articles this month. Sort of like early Christmas
presents.

~~~
jimbokun
If he really wants to play Santa, he can follow up with a bunch of
improvements in a new Arc release. :)

~~~
fallentimes
The real Silicon Santa is Ron Conway.

------
Ambix
Russian Translation:

[http://www.web30.ru/2008/12/07/mogut-li-venchurnye-
kapitalis...](http://www.web30.ru/2008/12/07/mogut-li-venchurnye-kapitalisty-
stat-zhertvami-krizisa/)

------
bmagierski
Very interesting ... I think this is true for a class of startups, but not
all. The question for this approach will be how to achieve scale (of if they
even want/need to) to achieve their goals.

While profitability can be achieved on $15k, is it sustainable and can it
achieve scale on that money? Cloud computing may help, but may not solve it
all. Facebook, Google, etc. all needed VC $ to fuel scale.

Implications exist for founders and early investors if future capital is
needed for scale or an exit. If the goal is to either sustain the profitable
model and owner control at lower revenue, then this model works. Also, if the
goal is to sell to a larger company to achieve an exit and return, then it
also works. All depends on the market opportunity and founder goals, but don't
think it kills the need/importance of VC.

If the goal is to capture a significant market and be the leader, and software
markets tend to be winner take most markets, then achieving scale fast is
necessary and VC$ necessary even in a cloud model. Under the new landscape
articulated by PG here, the underlying platform could be built & proven with
angel money or no money, and thus preserve more upside and better terms for
the founders that choose to seek scale in large markets.

------
heuristocrat
There is a big difference in capital required for an online internet, service
or software company and most other types of start-up businesses. VC will
absolutely play a major role because money is needed for equipment, teams of
people and global operations. The effort required to raise $1M is way more
than 1/10 of raising $10M - so raising small amounts of capital is probably
very inefficient in general.

------
bryc3
Great post Paul. One thing to highlight is that traditional VCs, historically,
don't make "venture level" returns in efficient markets.

Your examples highlight the cash efficiencies of early stage software/web
based businesses from which VCs have been making a fairly vocal move away from
for years. Similarly scaled efficiencies aren't yet being recognized in clean
tech, new materials, networking hardware, semiconductors, pharmaceuticals and
many many categories.

As for web and software, I think the lesson many firms are beginning to apply
from this last wave is that there's an inflection point a company hits where
its been sufficiently derisked and is poised to scale at which time the VC is
more than happy to dip into their large funds and "pay up" in terms of
valuations. Its what they did with Google and Facebook (among others). I think
it will create a more bifurcated web/software venture environment than we have
today but I don't see that as the death knell for the broader venture
industry. Certainly a great opportunity for seed funds like yours and
ours...bryce@oatv

------
JayGodse21
This is a good question.

I think that VC in its current form will be a casualty of the recession. In
its current form, the VC grabs a chunk of cash as a management fee, and
another chunk of cash to put "adult supervision" of seasoned executives on the
management team. Also, VCs are not able to manage the kinds of small
investments that startups need because VC partners have limited time. Because
their of their high overheads in the form of management fees, "adult
supervision" the small investments simply will no longer pay them what they
need to profit. Therefore, from that perspective, I think that VCs are going
to be forced out of the web startup sector.

In addition, they will also get booted out of sectors that use successful web
startups to bootstrap other kinds of businesses. Let's face it...just as you
can use a consulting business to bootstrap a company, you can also use a
successful web startup to do the same.

I think that a new trend that will emerge is that large enterprises will start
buying up web startups to take over the product for use in their internal
operations. Think of it...suppose you are a large enterprise who wants to
build some fancy web based software to improve some business process. You have
a choice between funding an internal group that may take 12 months using
"Cadillac" components and cost $600k , or you could just troll the 'net and
look for a startup that does something similar and buy them up for $300k,
which gives them rights to working software and the talents of the developers
(using appropriate golden handcuffs). It also gives YC a the proverbial 10x
return on its proverbial $15k investment and each of the proverbial 3 founders
a $50k equity bonus. This will diminish the influence of VCs because web
startups that have taken in even a million in VC funding will not be able to
sell out for less than $10 million...a price too high for enterprises to spend
on business process improvement.

------
gregboutin
What wizard is going to run your cheap adword campaign (or maybe adword is
dead too?) How are people going to find your site? What’s your sale process
and have you understood your audience? How are you going to answer those
service calls and emails? Are you going to run the next Google on the cloud?
There are costs associated with all of that, and, even if they are compressed
by technology too, the investments required to keep differentiating yourself
are increasing.

What’s worse perhaps is that, with all its focus on IT, Paul seems to forget
that not all start-ups are web start-ups. How about biotech, cleantech,
robotics? Is marketing and distribution free for those ones as well?

There is, as always, some truth in what Paul is writing - the man is smart -
but in my view, VCs are certainly here to stay and scale those start-ups that
can make it into serious money machines. What do you think?

Full comment at <http://www.torevenue.com/?p=3>

------
johnrob
Would be possible to build a google/facebook/linked-in all the way to profit
without significant cash up front?

Any business relying on network effects is going to need upfront cash. Since
these types of business tend to become the fund-making "homeruns", I think VCs
will stick around, doing what they are best at - chasing the big hit.

~~~
aneesh
TicketStumbler, like any other marketplace, definitely relies on network
effects. And, Google arguably doesn't rely heavily on network effects.
Google's value to me (in the short run) is unaffected by how many other people
use it.

~~~
fallentimes
Sort of. We rely on how many providers we have, but even that has its limits
once you have all the big ones (which we do). TicketStumbler is just as useful
for one person as it is for 1,000.

You'd be right if you applied your statement to Stubhub or Ebay. We're more of
an aggregator than a market place.

------
Mor
You paint a very bright picture for stratups and a dark one for VCs. While as
an entrepreneur myself, I wish that was the case, in reality though, the two
are tightly coupled.

Even though startup funding-needs are smaller these days, very few
entrepreneurs can find a team who would work for free all the way to
profitability. In fact, VCs today are able to get more equity for less money.

But the fundamental problem is that the average time for exit is getting
longer, mainly due to the poor stock market condition, where IPO have almost
disappeared and corporates are willing to put smaller amounts for M&A.

Once the market will bounce back and stratup will have a more promising
outlook, I'm sure you'll see VCs happy to invest and startups happy to take
the money.

Mor Sela Co-Founder and CEO <http://www.ProCompare.com>

------
s_baar
I'm not very knowledgeable about this, but from the charts I remember seeing
during the Sequoia "buckle-up" PowerPoint, isn't it an undisputed fact that
there has been an unsustainable boom in VC? Investment in VC has been
independent of it's marginal profitability declining due to traditional deals
becoming fewer and the recession in general.

The shift in what is funded is no surprise by now. The only questions are 1)if
the new bio/green tech startups will be successful, and what the role for VC
will be in other sectors and 2)What will happen to the current crop of VC
firms now? As flattering as it is that funding in VC has remained constant, is
it still a wise investment?

I don't know what the answer to these questions are, but they're the ones that
stick in my mind. On a positive note, at least one stressful part of the
Internet startup process is in decline.

------
kenosha_kid
For a long time VCs have prided themselves on "adding value" beyond the
capital invested. I wonder if part of the phenomenon you describe is a
realization, at last, that there is no value-add. Which is not necessarily a
comment on VCs, but also on the increased sophistication of entrepreneurs.

------
alain94040
Couldn't agree more. As a serial co-founder myself, I can't wait to be able to
fully start businesses with no VC involvment.

One thing is bogus in the article though: it's age-biased. $3000/m to cover
living expenses for the founders? Yes, if you are talking about kids straight
out of college living in a dorm. What about slightly less desirable older
people, like say 30-year old (now, that's old :-). So a startup with 3
founders would need closer to $15,000/month of revenue. Well, it's not so easy
to generate that kind of revenue.

The better advice is to find co-founders who can work part-time (evenings and
weekends). That can sustain itself for a long time, even if it feels like it
takes forever to get anything done.

fairsoftware.net - where software developers share revenue from the apps they
create

~~~
BerislavLopac
"So a startup with 3 founders would need closer to $15,000/month of revenue."

This depends on where you live. I'm just starting a project with one partner
-- we are both entering forties and have two kids each -- and even with
another employee we plan to live comfortably while burning under $10k.

------
Jame
Although web software companies can easily grow with small investments,
hardware companies are a different story. Saas can make it easily with no help
but if we are looking for an apple, a super android phone, a new sidekick or
another AMD VCs better keep writing big checks.

------
cmottau
The problem with the VC model is that they look for a large liquidity event in
the short term, and so push companies aggressively to reach this goal. With
the number of IPOs so low these days, these liquidity events are much more
infrequent than they used to be, yet the VC model remains the same. It angers
me that nobody is doing anything to innovate in this space, as funding is
hands down the most limiting factor for a new venture's growth. I found this
slideshare presentation which includes some of the freshest thinking I've seen
on the subject. Any thoughts? <http://cli.gs/g3BA9v>

------
kika
I never understood this one:

"Someone running a startup is always calculating in the back of their mind how
much "runway" they have—how long they have till the money in the bank runs out
and they either have to be profitable, raise more money, or go out of
business."

Why go out of business? Okay, you're out of money and you're not profitable
yet. Let people go and return back to square one. Two founders in the garage,
but now you have a codebase, a beta version probably, a website and some
connections in the industry. Yeah, tough times, but when I see people going
out of business in such situation I always think that they were there for a
VC-backed salary and some fun.

------
eddievonnexus
What about angel funding? Cnet News is carrying a story that sounds very scary
(the news media thrives on scariness) about "Agnels flee tech start-ups":

[http://news.cnet.com/Angels-flee-from-tech-start-
ups/2100-10...](http://news.cnet.com/Angels-flee-from-tech-start-
ups/2100-1014_3-6248877.html?tag=mncol)

In the mean time, Mr. Megalomania Ray Kurzweil (who has yet to comment on how
well his "house casino" hedge fund has been doing lately) said he's starting
The Singularity University:

<http://news.cnet.com/8301-11386_3-10155303-76.html?tag=mncol>

------
davidschulhof
In my opinion, there are some problems with this premise. Even though a
company is profitable, it may have negitve cash flow, and need to raise money.
Then there is the oppertunity cost, say you make a better mousetrap, but I
raise all the money. I can buy you, and still make more. There have always
been ways to start a company without investment, I started a company with
$10,000 and sold it two years later for $1MM, and that was in 1986 without any
internet! I dont think the writter of this article has thought this through,
too many holes. David Schulhof

------
kyletbrown
Very interesting ... I am going thru this exactly. We had a couple vc's that
are in due diligence, but in this economy, I don't think it's best for us to
take the money. Our overhead (as you mention in your article) is essentially
just the founder's living expenses which we have been able to cover for nearly
4 years now.

My choice is either raise vc, or sell something. Selling something is non-
dilutive. VC's need to get a clue. If I take $1 or $5M, I'm going to give away
1/2 the company, so might as well as for $5M. But what the hell do I need that
much money for!

Bootstrapping's back in style.

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EngagoTeam
1) Time is money. All the time a start-up invest in pleasing and answering
VC's, it is time that they could have spending on developing or marketing
their product or solution.

2) Maybe VC's will now have to approach start-ups and ask if they can help to
grow the company.

3) Currently there are many small companies running out of money. Larger
companies will buy them up at prices below the investments VC's have made. In
many cases VC's never going to get their $33mio back on companies that hardly
have a revenue of $10mio in a limited market.

(We're self funded: Engago Technologies Ltd.)

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earcaraxe
I'm honestly surprised that it's taken you this long to go out and say this.
I've loved reading your articles and essays about startups, and I've soaked up
all of it, but one of your big topics is dealing with investors. I've talked
with a lot of entrepreneurs, and bootstrapping seems to slow things down
slightly, but with the technology available as cheaply as it is, living
expenses are the biggest thing, and if people can figure out how to live on
the margin, they could launch a startup on next to no money at all.

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maxl
This is something that I've thought about for the last several years. I think
that this article should mention that what is meant by VC is really "VC for
web companies". What I suspect will happen is that there will be fewer and
fewer web companies (with good ideas and the need for large capital) that need
funding, and it will make more sense for VC's to invest in startups that are
in more capital-intensive sectors like energy and biotechnology.

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kidehen
Paul,

Great post, extremely poignant!

In a few years time, VCs may be pitching to Entrepreneurs (Dragon's Den Syle!
[1]) :-)

Links:

1\. <http://www.youtube.com/watch?v=HDczbpIO85g> \- note these guys like most
missed the Linked Data URI pitch with their DNA miscue

Kingsley Idehen <http://www.openlinksw.com/blog/~kidehen>

------
DThrasher
There's another explanation for the 40% rise in applications received by
YCombinator. Much of YCombinator's seed-stage competition is moving up-market.
All the VCs we've talked to on the east coast now target post-revenue
companies, not seed-stage start-ups. If there are fewer VCs looking at early
investments, you'd expect YCombinator's applications to go up.

------
mpk08540
Largely true, not controversial, I'd say. The VCs I talked to are not in
denial; but still value cash they're getting from their management fees. That
phase will be over soon. Question for Paul: what alternative investment
vehicles will arise in the years to come? How about some smaller-scale buyout
businesses?

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tptacek
A lot of people want to start companies now, VC or no VC. But IT and
development jobs remain relatively abundant; someone who can make a credible
run at a startup can also land a new job in less than a month. That may not
remain the case, and job security could constrict the flow of talent into
crapshoot startups.

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lkozma
From the title, for a moment I thought the article was about some new result
in machine learning that would make Vapnik-Chervonenkis theory obsolete...

<http://en.wikipedia.org/wiki/Vapnik-Chervonenkis_theory>

------
valto
What a great post Paul, thanks for this. we are workin hard with a new funding
business model & service for web start-ups, see www.growvc.com

"What do you get when you break the traditional vc funding model and then
restructure it with some social media & web 2.0 glue?”

------
electric
"Imagine what it would do to the VC business if the next hot company didn't
take VC at all."

No need to imagine. Just look North -- this is reality.

Neither RIM (makers of the blackberry) nor Cognos (now IBM) took VC funding.

VC has imploded in Canada and startups are surviving as they have always.

~~~
gruseom
RIM started in 1984 and Cognos in 1969 [!], so I'm not sure what conclusion
you can draw from their early histories.

Also, RIM "was financed by Canadian institutional and venture capital
investors in 1995" (<http://en.wikipedia.org/wiki/Research_in_Motion>).

------
spitzer
See Valley Guru Michael Malone's "Washington is Killing Silicon Valley" in the
Wall Street Journal for more on this. Be sure to consider all these new
outside forces. Some factors are better than ever, but others are worse than
ever.

------
snewe
The conclusions really applies to VC for IT, not so much Biotech or clean
energy.

------
jgervin
Its more than the recession. Its the next revolution. We have microtized/DIY
everything. VC's are just one of those that is both a casualty and a cause.

Wrote about his over two years ago but re-posted recently at www.flairjax.com

------
EngagoTeam
We always wondered what brings a VC besides money and pressure? VC's require
time too (5% of your time).

If a VC can bring leads, customers or users, then he brings additional value.
If not the added value of a VC is just money.

------
hardaway
In Arizona, if we depended on Vc, we'd be dead. We have a very vibrant startup
community that works by collaboration,mentoring, and whatever it can scrape
together. Do we start Google? no. Do we innovate? yes.

------
anthonyrubin
pg won't be getting a job at 37signals.

~~~
staunch
<http://news.ycombinator.com/item?id=219085>

------
d0mine
It sounds overly optimistic.

Why a total amount of money spent online should increase? More and more
players are competing for the same or diminishing pie slice.

Google can buy only so many startups after all.

~~~
Dilpil
Is money spent online really one category? Why should money spent at malls
increase?

------
nazgulnarsil
summary: bootstrapping is easy when you only weigh a few pounds.

------
RomanZolotarev
In Russian [http://spring.jumpidea.com/2008/12/paul-graham-
divergence.ht...](http://spring.jumpidea.com/2008/12/paul-graham-
divergence.html)

------
fierybones
Excellent assessment, and a definite possibility - though hardly foregone at
this point.

I especially enjoyed the comparison between startups and dogs.

------
yason
Sounds like the time to go get VC funding for an angel investor company.

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aquarin
"Could VC be a Casualty of the Recession"

No, the War in Iraq is.

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mdonahoe
spell check time

"In a lot of startups—probaby most startups funded by Y Combinator"

you mean "probably" i assume. no big deal

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jgalvez
Best PG essay this year.

------
jwesley
Good riddance.

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shareme
I notice the same attitude developing among myself becoming a recent founder

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robak
This is so obvious. I think it has been for a few years now. I would push it
one step further: if you need to borrow money, you are not efficient enough.

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drwh0
two points:

1\. investors are entering a period of risk aversion that is just starting,
and will likely last a decade or longer.

2\. the next market, energy tech, will require funding on levels very few if
any VCs can deliver (billions per investment). this is why the govt is likely
going to be more pivotal in funding energy work through the DOE etc

------
RobertL
Great link. Paul is right on. I was wondering when someone was going to figure
this out.

