Could VC be a Casualty of the Recession?

Completely, totally agree. I was just discussing this today with my business partner; I think that many people won't even know what to do with extra money if it is given to them. That's never happened before - there's always been the "well, we could use more servers" or "well, we could always hire more engineers" argument. Today, I think a lot of people are beginning to realize that 1) if you engineer your applications properly, and on the right platforms, you can scale your server demands along with your userbase/revenues; 2) more engineering/other assorted human capital won't necessary translate into better, more usable product.

I personally believe this is the beginning of a massive shift, and one that isn't even tied to the economy - but, of course, will be dramatically accelerated as a result of it. On the point of what happens to the startup community, however - I think it will be a lot harder to start a me-too company and get any traction; as a result, even with the lower cost of business, there will be fewer people able to enjoy the benefits. It's sort of like the rest of the economy - if you are the absolute best at what you do, it's a great time to be in business; for everyone else, the situation is precarious. Running on $3000 a month is great, but not if that means you're losing $3000 a month with no foreseeable way of recouping your investment.

Perhaps that's where the VCs will step in - sweep those flailing enterprises under their wings, pump greater capital/human resources into them, and try to brute-force them into successful enterprises. In effect, they would become the startup version of their private-equity peers; not a bad place to be, but again - the best will survive, the rest will die.

If I were motivated only by self-interest, I should want later stage investors to drop out. That would leave seed stage investors like YC as the only game in town.

And incidentally, I don't see why it's easy to upper bound wealth creation over any time period. If everyone woke up tomorrow and started working twice as hard, what would limit their output?

The startup I work for just hit profitability and we're basically giving up on funding. The offers that we were getting weren't good enough. We'll grow slower, but we won't get dilution unless it's really worth it.

What I'm curious about is that I thought the purpose of VC was not just to stay in business, but to grow fast. I'm pretty sure PG said in a previous essay or comment that if you skip out on VC and someone else takes it you can get overtaken or not be able to catch up to the market leader.

If there's any truth to pg's claim that the paradigm is shifting and that talented people are increasingly likely to start their own thing than go work for a boss (and personally, I believe there is), then one would expect just the opposite of what you assume: more wealth should be created this way in the next 5 years than in the previous 5, because more value will be. And the productivity delta between startups and large companies will grow even faster, since the latter will be increasingly starved for new talent.

Edit: one might also expect current economic conditions to accelerate this process, since downturns are harder on inefficient players than efficient ones. It occurred to me the other day that for this reason, downturns are a healthy part of the economic system, kind of like forest fires in ecosystems.