Friday, December 5, 2008

Death of VC? Why Paul Graham is wrong... for now

A few days ago Paul Graham (whose essays I've long enjoyed) posited the following (now also being discussed on TC)...

"If founders decide VCs aren't worth the trouble, that could be bad for VCs. When the economy bounces back in a few years and they're ready to write checks again, they may find that founders have moved on." (full article)

Lower cost of starting up = Don't need VC?

While he is right that initial startup costs have dropped, typically the reason why you as an entrepreneur bother going through the pain and stress of starting something new is in the hope of creating something wildly successful. Should this happen you'll be growing far too fast to fund it out of your own nascent income (and if you're like most big hits in the Valley your income for the first year or two will be at or close to 0). 

Let's review the case of Youtube... Product became a hit, traffic shot up at an unbelievable pace, huge bandwidth bills, scary lawsuits. So while it's possible the technology costs may become largely irrelevant as he suggests (though I'm doubtful), the people piece (engineers, sales, management, lawyers) remains and their cost isn't rapidly decreasing.

So while he is probably right that Series A as we know it is slated for the scrap heap (since early costs used to be dominated by now much cheaper technology purchases), there is still Series B and C and with the IPO market decimated by Sarbox there is a much greater need for Series D's and perhaps beyond..

So Paul, I think it's a little early to start playing taps for the Sand (Hill Road) people... they will simply move up market, though that reminds me of one of my favorite books.