Venture financings are up. Is this a good thing?

Venture capital has not died, despite a big dip in Q1 2009 financings. But honestly, everyone might benefit if a significant percentage of the industry's members went on life support.

So while ReadWriteWeb waxes hopeful about the venture industry's 61 percent jump in financing in Q2, I'm not so sanguine.

As The Economist notes, we still have an oversupply of poorly managed venture capital firms:

(The) root cause of the (VC) industry's problems...is that most venture capitalists have failed to find enough decent companies to deliver the return they promised investors....Although many venture capitalists have been outstanding at raising cash, they have been pretty lousy at investing it.

The problem may not be that VCs aren't bright, but that there are simply too many of them. As 10-year returns increasingly look negative (as Paul Kedrosky and others have written), we're likely to see a shakeout in the VC community.

In fact, we're already seeing it, with venture funds raising just $1.7 billion in the second quarter, a 13-year low, as TechFlash reports.

Wheat, please say goodbye to the chaff.

Yes, ReadWriteWeb is right to suggest that more money means more employment for entrepreneurs, but I think it's dead wrong to suggest that more entrepreneurs necessarily lead to a rosier outlook for the economy.

Indeed, it strikes me that what we need are better entrepreneurs (and better VCs), which is something that scarcity seems better able to produce, not abundance, as called out by recent studies. "Survival of the fittest," in other words, should produce better startups than "subsistence by VC food stamps."

It is telling to me that many of the best open-source companies--Red Hat, MySQL, JBoss (now Red Hat), etc.--have taken relatively little venture money. They've had to strain earlier at profitability than many of their Silicon Valley peers, and it has been a great boon to them.

We talk often about how cheap it is to start a company these days. If this is true, we should see far less money raised, yet we still see Twitter raising huge piles of cash ($55 million and counting)...yet hardly seeming to spend any of it.

Unfortunately, that money will be spent, and money often ends up hurting as much as it helps, as it tends to amplify character flaws, both personal and corporate.

So, here's hoping that it will become harder, not easier, to raise money, whether you're a VC or an entrepreneur.

If I'm right, we'll all be better off in such an environment.

Of course, if I'm wrong, we'll all be unemployed and be forced to turn to dairy farming.

Follow me on Twitter @mjasay.

[bonesbautista]

I'm working on an affordable child care development with the hope of creating a short term job, and I've got five tenants already interested and four of them are ready to commit, each with long-term history - and I can't get any financial entity interested even with a sustainable business model. Reading about Twitter's ability to raise funds with no business model whatsoever almost makes me want to consider giving up and turning to milking cows at your dairy farm...

[The_Decider]

No, it is a bad thing. If a company that use for products or services sell out to a VC company, I stop using them. If the company goes public I try to stop using them if I can, or cut down a significant amount. Why?

Once a company sells out to a VC or the stock market, their focus changes from customers and products to maximizing profit and that is when product quality drops, and customer service disappears.

How many VC funded businesses actually grow into something? <0.1%?

How many VC funded businesses are run by people looking for the quick sell-out and therefore produce nothing of real value? >99.9%?

VC funded business are the junk bonds of the 21st century.

Software companies can grow organically without outside interference. It was true in the 70's, it is true today.

[SIGHUP]

I couldn't agree more with you. VCs are just a fancy version of a loan shark.

[jonathanaberman]

The poor VC. So mch vilification, so little time. But, let's take a step back here, and take a look at a few important things about the US economy: (i) small businesses are the predominant job creator in our economy, (ii) technology commercialization is one of the areas where the US economy sill has an international advantage (or is at least competative), (iii) academic studies at places like Harvard Business School show that there is a strong correlation between the involvement of venture capitalists and the growth of large technology companies (which, by the way provide a large portion of overall technology employment in the US -- around 1 out of every 8 technology jobs in the US at last count) and (iv) not every new technology can be commercialized by bootstrapping.

Without question the current venture capital industry is configured incorrectly in two important ways: (i) it is not configured properly to provide the right level of capital and help to start ups in technologically mature areas like software and (ii) is not prepared to delploy capital in emerging technologies that are far from commercialization. This is not a trivial problem, and is not about the VCs. What it's about is our economy's dependence upon innovation, and skilled company builders that can help make a business idea a successful company.

Whatever negative things one can say about VCs (and there are some lousy ones to be sure), there are also many very good ones (as there are good Angel investors) that understand the importance of entrepreneurial support and company building. The economy needs these types of skill now more than ever.

The current shake out in the industry is more a reflection of the problems that endowments and pension funds are having due to the meltdown in the stock market and private equity. They are cutting their allocations because they can't take risks. This lack of risk capital is a signfiicant problem and our economy needs to solve this problem. We can revel in the humbling of some VCs who drive expensive cars and have offended some entrepreneurs, but overall the problems in the VC industry are going to require the emergence of new economic models, both public and private, to fill this void. Our economy needs both early stage capital and experienced company builders to work with entrepreneurs. In my experience there isn't enough of either of those right now, and current trends are not favorable.

[The_Decider]

Sorry, but there is no such thing as a good VC. Their only goal is to make as much as possible as fast as possible. That is not conducive to growing a stable, worthwhile company that will last over the years.