This review examines experimental evidence that the microvascular dysfunction that occurs early in sepsis is the critical first stage in tissue hypoxia and organ failure. A functional microvasculature maintains tissue oxygenation despite limitations on oxygen delivery from blood to tissue imposed by diffusion; the density of perfused (functional) capillaries is high enough to ensure appropriate diffusion distances, and arterioles regulate the distribution of oxygen within the organ precisely to where it is needed. Key components of this regulatory system are the endothelium, which communicates and integrates signals along the microvascular network, and the erythrocytes, which directly monitor and regulate oxygen delivery. During hypovolemic shock, a functional microvasculature responds to diminish the impact of a decrease in oxygen supply on tissue perfusion. However, within hours of the onset of sepsis, a dysfunctional microcirculation is, due to a loss of functional capillary density and impaired regulation of oxygen delivery, unable to maintain capillary oxygen saturation levels and prevent the rapid onset of tissue hypoxia despite adequate oxygen supply to the organ. The mechanism(s) responsible for this dysfunctional microvasculature must be understood in order to develop appropriate management strategies for sepsis.