Is Venture Capital in Trouble?

Pretty scary stuff.

Now it was VentureBeat's turn. Wednesday, Marshall published a story that put it in the simplest terms: "The VC Model is Broken," the headline read. And although he didn't agree with many of Ressi's premises (neither do I), he did agree with the conclusions, and was prepared to take them even further.

Marshall offered three reasons for Venture Capital's current woes:

1. Early VC successes -- Companies like Intel, Cisco and Genentech were so hugely successful that they drew huge sums of money from investors around the world anxious to get into the VC game . . . over-stressing what should have remained a niche industry.

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2. Established companies have gotten smarter -- Firms like Google and Microsoft snatch up hot new startups before they can become serious competitors, taking them off the market before they go public.

3. "Greed. Pure and simple." -- Those are Marshall's words, and by them he means that VCs have continued to raise ever-larger funds, even in the face of low returns, because the administrative fees are a major source of revenues to their own firms.

This all sounds reasonable, but I think that Marshall, surprisingly, has it exactly backward. Perhaps it's because he hasn't been around long enough to see an earlier slowdown in the Venture Capital industry -- and, thus, has no standard by which to compare the current one.

Sure, venture capitalists are greedy -- but they always have been. It's greed that makes them try to make investments with the greatest possible return (and, unfortunately, also makes them sometimes run in blind herds). And, yeah, big companies have gotten smarter about their mergers and acquisitions. But the main reason they are able to snatch up hot young start-ups is because those young firms cface no real alternative but to get bought.

That's why every business plan in Silicon Valley seems to end with the phrase, "And then we sell to Google."

What Ressi and Marshall see as a structural failure is, in fact, the result of external forces largely beyond the control of the venture-capital industry. What these two gentlemen don't realize is that we have seen this happen once before.