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Paul Graham on the Venture Capital Squeeze – or will founders be able to get VC funding AND partially cash out ?

Paul Graham has a provocative suggestion in his post, “The Venture Capital Squeeze” [via Kevin Burton]: as they fund the working capital of a startup, VCs should consider acquiring a small portion of Founders’ equity in order to provide them with a (sometimes much needed) bit of cash. Paul’s thesis is that this would make “early take-out” offers from large companies less interesting:

Whatever they say, the reason founders are selling their companies early instead of doing Series A rounds is that they get paid up front. That first million is just worth so much more than the subsequent ones. If founders could sell a little stock early, they’d be happy to take VC money and bet the rest on a bigger outcome.

So why not let the founders have that first million, or at least half million? The VCs would get same number of shares for the money. So what if some of the money would go to the founders instead of the company?

Some VCs will say this is unthinkable—that they want all their money to be put to work growing the company. But the fact is, the huge size of current VC investments is dictated by the structure of VC funds, not the needs of startups. Often as not these large investments go to work destroying the company rather than growing it.

The angel investors who funded our startup let the founders sell some stock directly to them, and it was a good deal for everyone. The angels made a huge return on that investment, so they’re happy. And 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.

Full Discussion: http://blog.softtechvc.com/2005/11/paul_graham_on_.html

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The Venture Capital Squeeze

Paul Graham

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. This by itself is not the end of the world. In fact, it’s just a more extreme version of the norm in the VC business: too much money chasing too few deals.

Unfortunately, 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.

Full Story: http://www.paulgraham.com/vcsqueeze.html

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