Good-bye and Thanks for All the Carried Interest

There is something of a fin du siecle gloom-fest going on in venture capital this week. Here is venture guy Promod Haque of Norwest in the current BusinessWeek:

“Over the next five to ten years, I believe there are going to be half as many venture capital firms in this business, and there are going to be half as many companies being created,” he said.
Haque contends that there is a supply-demand imbalance between the amount of money earmarked for funding startups and the appetite for startups’ products. There are simply too many companies created and not enough paying customers, he says.

And here is Battery Ventures founder Howard Anderson in the June issue of MIT Technology review:

Finally, it’s not just supply of new technology that is too abundant. Ten years ago there were 240 member firms in the National Venture Capital Association. Today, that membership has nearly doubled, and our fund size under management has increased eightfold. There’s too much venture money pursuing too many deals. There’s nowhere for all that money to go: we can’t spend the money we’ve raised.
Venture capitalists view themselves as pragmatists, but if they think the dynamics of the business haven’t changed, they’re as self-deluding as the next person.
Ever wonder what we did for a living in early-stage venture funding? I bet you think we spent the day searching for the next insanely great company. But we spent most of our lives in endless meetings with people who were lying to us: scientists who swore that their patents were solid and entrepreneurs who insisted that they had no competition. We lied right back at them: said our money was different.
That was the old way, and it was tons of fun, and we all made too much money. I’ll miss it. But now the markets are too rational, and the returns are too small and uncertain. So, time to leave.

Are they right? While I’m tempted to paraphrase Arthur C. Clarke back at them — When a distinguished but elderly venture capitalist states that venture capital is booming he is almost certainly right. When he states that venture capital is broken forever, he is very probably wrong — but I’ll demur on beating that one too much.
Why? Because I think venture capital has changed a great deal in recent years, that it has become much more efficient, and that a very different approach is required, one that I have alluded to in prior posts, and one that I will continue to build on in some upcoming comments.

Related posts:

1. Pining for the Glory Days of Venture Capital
2. Great vs. Good vs. Bad VCs
3. Newbies Flood Venture Capital (Again)
4. Pouring, Drinking, and the Allocation to Venture Capital
5. Who needs venture money?