Bronte Media

Paul Graham, who organized the very good Startup event last month, has posted an essay on how the venture capital industry is being squeezed by two sides: everything getting cheaper and founders being able to cash out earlier to firms like Google.

Graham’s essay in part comes from remarks by Chris Sacca, a New Business Development Principal at Google. Chris said that once a small team had a technology demo of their service that they should come to him so Google could buy them. Graham put it this way:

Google, typically, seems to have been the first to figure this out. “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.) It is a brilliant strategy, and one that other big technology companies will no doubt try to duplicate. Unless they want to have still more of their lunch eaten by Google.

With software and hardware falling and programming languages making engineers ever more productive, startups don’t need a lot of money to get things done. At the same time, venture capital firms are raising larger funds. It has been somewhat curtailed in recent times but the size of funds now is larger than it was 10 years ago. That’s important because the number of deals per fund stays relatively constant.

It all boils down to the conundrum that startups need less money and VCs want to invest more. Graham suggests that part of the rounds be given to the founders of the company (< $1m each) to diversify their wealth and get everyone on the same page and chasing the same scope of returns. That is a reasonable suggestion but it would require a tectonic shift in the way venture capital is done.

On the other end of the spectrum, my favorite and most respected blogger, Bill Burnham takes a look at the wireless email space and the gluttany of money pumped into a few companies. If there is any evidence of a bubble it is in wireless email at the moment. Ridiculous valuations and significant chunks of capital chasing evaporating opportunities. Forget about the kids coding ajax calendars. By the way, after you are done reading Bill’s post, subscribe to his feed if you already haven’t. One of the best out there.