In his latest essay Why There Aren’t More Googles, Paul Graham writes that one reason is that VCs are waiting too long for startups to have “traction."  He suggests that VCs should invest earlier and less money.  Paul writes:

Whoever the next Google is, they’re probably being told right now by VCs to come back when they have more "traction.”

and

Instead of making one $2 million investment, make five $400k investments. Would that mean sitting on too many boards? Don’t sit on their boards. Would that mean too much due diligence? Do less. If you’re investing at a tenth the valuation, you only have to be a tenth as sure.

At USV we believe that investing earlier and smaller amounts can be a great fit for some of the very capital efficient businesses that are emerging.  We have made several relatively small investments, including Tumblr and Disqus (this blog is hosted on Tumblr and uses Disqus for comments).

But I believe Paul is wrong in equating this with investing in startups that don’t yet have traction.  When we invested in Tumblr and Disqus, both of them already had significant traction in terms of actual usage.  What Paul ignores is that there is a non-linear reduction in risk that takes place with adoption of a service.  I have written about this before in the context of whether it’s better to have a great team or to have traction.