This link has been bookmarked by 26 people . It was first bookmarked on 02 Mar 2006, by Wade Ren.
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17 Nov 17
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In the next few years, venture capital funds will find themselves squeezed from four directions. They're already stuck with a seller's market, because of the huge amounts they raised at the end of the Bubble and still haven't invested.
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it's just a more extreme version of the norm in the VC business: too much money chasing too few deals.
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those few deals now want less and less money, because it's getting so cheap to start a startup. The four causes: open source, which makes software free; Moore's law, which makes hardware geometrically closer to free; the Web, which makes promotion free if you're good; and better languages, which make development a lot cheaper.
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A lot of well-known applications are now, like BaseCamp, written by just one programmer. And one guy is more than 10x cheaper than ten, because (a) he won't waste any time in meetings, and (b) since he's probably a founder, he can pay himself nothing.
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Because starting a startup is so cheap, venture capitalists now often want to give startups more money than the startups want to take.
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Largely because of Sarbanes-Oxley, few startups go public now. For all practical purposes, succeeding now equals getting bought. Which means VCs are now in the business of finding promising little 2-3 man startups and pumping them up into companies that cost $100 million to acquire. They didn't mean to be in this business; it's just what their business has evolved into.
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Hence the fourth problem: the acquirers have begun to realize they can buy wholesale. Why should they wait for VCs to make the startups they want more expensive? Most of what the VCs add, acquirers don't want anyway. The acquirers already have brand recognition and HR departments. What they really want is the software and the developers, and that's what the startup is in the early phase: concentrated software and developers.
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"Bring us your startups early," said Google's speaker at the Startup School. They're quite explicit about it: they like to acquire startups at just the point where they would do a Series A round. (The Series A round is the first round of real VC funding; it usually happens in the first year.)
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The Solution(s)
Bad as things look now, there is a way for VCs to save themselves. They need to do two things, one of which won't surprise them, and another that will seem an anathema.
Let's start with the obvious one: lobby to get Sarbanes-Oxley loosened. This law was created to prevent future Enrons, not to destroy the IPO market. -
Startups are fragile plants—seedlings, in fact. These seedlings are worth protecting, because they grow into the trees of the economy. Much of the economy's growth is their growth. I think most politicians realize that. But they don't realize just how fragile startups are, and how easily they can become collateral damage of laws meant to fix some other problem.
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when you destroy startups, they make very little noise. If you step on the toes of the coal industry, you'll hear about it. But if you inadvertantly squash the startup industry, all that happens is that the founders of the next Google stay in grad school instead of starting a company.
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My second suggestion will seem shocking to VCs: let founders cash out partially in the Series A round. At the moment, when VCs invest in a startup, all the stock they get is newly issued and all the money goes to the company. They could buy some stock directly from the founders as well.
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They don't want founders to get a penny till the company is sold or goes public. VCs are obsessed with control, and they worry that they'll have less leverage over the founders if the founders have any money.
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the reason founders are selling their companies early instead of doing Series A rounds is that they get paid up front.
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If founders could sell a little stock early, they'd be happy to take VC money and bet the rest on a bigger outcome.
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for us founders it blunted the terrifying all-or-nothingness of a startup, which in its raw form is more a distraction than a motivator.
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If VCs are frightened at the idea of letting founders partially cash out, let me tell them something still more frightening: you are now competing directly with Google.
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03 May 08
Chris MeredithIn the next few years, venture capital funds will find themselves squeezed from four directions. They`re already stuck with a seller`s market, because of the huge amounts they raised at the end of the Bubble and still haven`t invested. This by itself is n
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17 Feb 08
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02 Feb 08
Olivier LejadePaul Graham on venture capital again. Insightful again.
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20 Apr 07
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30 Aug 06
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24 Apr 06
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05 Dec 05
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17 Nov 05
Clair Chingan essay by Paul Graham about venture capitalists
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10 Nov 05
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09 Nov 05
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08 Nov 05
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07 Nov 05
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06 Nov 05
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05 Nov 05
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03 Nov 05
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02 Nov 05
Ben Foster"In fact, it's just a more extreme version of the norm in the VC business: too much money chasing too few deals."
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