Paul Graham wrote an interesting essay on how venture capital is getting squeezed by four distinct forces, the most interesting to me being how acquirers (e.g. Google - yes, I just broke my 30 day google free rule) are competing with venture capitalists by acquiring interesting startups pre funding. This is indeed happening to some degree, but it strikes me as a temporal issue because the market will quickly correct itself. Startup founders will figure out the new rules and game the system to get the best possible deal, and investors will just pay more to get in because they are buying future returns not current assets.
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.
The other factor that causes me to believe this not a long term issue is that the rate of startup creation is far greater than the rate of startup acquisition. I guess you should say that this condition is the same as predator going after a herd, it's harder for the predator to identify a single target in such a situation.
The other thing that this made me think of is something that Peter Rip wrote in his blog about risk preferences. Ironically, Peter also referenced Graham's post in his.
Starting a company is analogous to the first night in a casino for some entrepreneurs. If you are fortunate enough to create a small, but meaningful trove of winnings early in the night, you face the decision of taking a modest win home or staying longer and winning bigger or losing it all.
At the end of the day I think most entrepreneurs really do want to build something meaningful under their own flag. Not always, and for the right amount of money anyone will sell if anything to go build something new. But acquirers of pre-A companies really do need the people behind the company, hence the golden handcuffs are pretty significant.
As Peter points out, a more interesting challenge for investors and entrepreneurs is agreeing on the glasses to view risk through.
Most investors think they need management to be “at risk” to act like owners, not employees. In reality, we don’t want them to act like owners. We want them to act like investors, taking the same risks we would take.
Taking more risk in good companies and less risk in bad companies may end up resulting in companies requiring less capital over the long term, which then comes back again to something that Graham wrote that startups overall need less capital because starting a startup is just cheaper than it was before.