The Venture Capital Squeeze

Paul Graham’s essay The Venture Capital Squeeze argues that VCs face a four-directional squeeze threatening their business model.

The Four Problems

1. Excess Capital: VCs raised enormous sums during the Bubble and struggle to deploy them. “I don’t know what we’re going to do. Maybe we’ll just have to give some of it back.”

2. Falling Startup Costs: Open source eliminates licensing expenses. Moore’s Law makes hardware nearly free. Web marketing reduces promotion costs. Better programming languages reduce development needs.

3. Sarbanes-Oxley Burden: This regulation imposes “$2 million a year” compliance costs and deters experienced executives from leading public companies, effectively killing the IPO market for startups.

4. Direct Acquisition by Giants: Companies like Google acquire promising startups before Series A funding, recognizing they need only the software and developers.

The Implications

Graham contrasts his 1995 startup’s $38,000 in initial costs against today’s ability to obtain equivalent resources for nearly nothing. This fundamentally changes what startups need from VCs.

My Takeaway

The VC model evolved for a different era. As startup costs plummet, founders have more leverage than ever. Use it wisely.

How have falling startup costs affected your company? I’d love to hear at persdre@gmail.com.