I love Paul Graham’s essays. Just been reading one in which he’s pondering what the impact of the recession will be on venture capital. He thinks that it will probably dry up somewhat during the present downturn, like it usually does in bad times. But this time, he says, the result may be different. This time the number of new startups may not decrease. And that, he thinks, could be dangerous for VCs.

When VC funding dried up after the Internet Bubble, startups dried up too. There were not a lot of new startups being founded in 2003. But startups aren’t tied to VC the way they were 10 years ago. It’s now possible for VCs and startups to diverge. And if they do, they may not reconverge once the economy gets better.

The reason startups no longer depend so much on VCs is one that everyone in the startup business knows by now: it has gotten much cheaper to start a startup. There are four main reasons: Moore’s law has made hardware cheap; open source has made software free; the web has made marketing and distribution free; and more powerful programming languages mean development teams can be smaller. These changes have pushed the cost of starting a startup down into the noise. In a lot of startups — probaby most startups funded by Y Combinator [Graham’s incubator] — the biggest expense is simply the founders’ living expenses. We’ve had startups that were profitable on revenues of $3000 a month.

$3000 is insignificant as revenues go. Why should anyone care about a startup making $3000 a month? Because, although insignificant as revenue, this amount of money can change a startup’s funding situation completely.

Someone running a startup is always calculating in the back of their mind how much ‘runway’ they have—how long they have till the money in the bank runs out and they either have to be profitable, raise more money, or go out of business. Once you cross the threshold of profitability, however low, your runway becomes infinite. It’s a qualitative change, like the stars turning into lines and disappearing when the Enterprise accelerates to warp speed. Once you’re profitable you don’t need investors’ money. And because Internet startups have become so cheap to run, the threshold of profitability can be trivially low. Which means many Internet startups don’t need VC-scale investments anymore. For many startups, VC funding has, in the language of VCs, gone from a must-have to a nice-to-have.

That rings a lot of bells for me at the moment.

We’re in uncharted waters — see for example this NYT report.

“It’s pretty despondent everywhere,” said Dwyfor Evans, a strategist at State Street Global Markets in Hong Kong. “O.K., there are signs that some of the leading indicators have stabilized to some extent, but it’s at a very, very low level, and we’re not seeing corporate investment picking up, or consumers starting to spend again — in other words, the traditional mechanisms by which economies come out of a recession are absent at this time.”

Hopes that the American economy, which led the world into recession, might lead it back out this year have been fading.

Last weekend, Warren E. Buffett, the chairman of Berkshire Hathaway, wrote in his company’s annual report that “the economy will be in shambles, throughout 2009, and, for that matter, probably well beyond.”

As if to emphasize the problems, the Institute for Supply Management reported that companies in Britain, France, Germany, Italy, and the United States said business was getting much worse, especially in terms of jobs.

Paul Dales, an economist with Capital Economics, pointed to the survey in forecasting that the February employment report will show a decline of 785,000 jobs when it is released on Friday. If so, it would be the largest one-month decline in employment in nearly 60 years.

Last week, the United States revised its estimate of fourth quarter gross domestic product to show a decline at an annual rate of 6.2 percent, the worst in more than a quarter century. On Monday in reporting that construction activity fell sharply in January, the government also revised the December figure lower.

… in 1991, black motorist Rodney King was savagely beaten by LAPD officers. The beating was captured on amateur video and later provoked a national outcry. You might call it the beginning of citizen journalism.