Editor’s note: Filling in for Rick Smith today is Bill Warner, who writes “The Angel Connection" for LTW.

RESEARCH TRIANGLE PARK, N.C. Some of the leading venture capital firms are being much more introspective about where their industry stands and why many venture firms are failing, according to a recent report in The New York Times.

The current venture capital model is not working.

Sure, there have been a lot of external factors that have driven the failure, not the least of which are the economy and burdensome government regulation. But that’s not the whole story. Venture capitalists are now recognizing that their venture fund model is not working:

  • Funds are too big, causing returns to fall; now about 6 percent.
  • Too many inexperienced people are making investment decisions.
  • Senior partners are losing touch with their industries.

Venture funds have to shrink

Many of the leading venture partners predict that there will be massive fallout of venture firms, perhaps as many as 1/3 to 1/2 of the 882 active venture capital firms, over the next two years.

Today, this is a returns-driven business. Venture firms simply figure out how many deals they can support with their professional staff, divide that into the size of the fund, and then force-feed that amount of investing into their deals. This is an over simplification, but they definitely need to spend more time on figuring out how much a business needs and then provide that amount.

With the glut of money that has been flowing into the venture firms, an increasing redundancy of companies in the same industry space has emerged that tends to drive up their valuations. This also puts pressure on returns when it comes time to exit.

The look of the new venture capital firm

Firms like Greycroft and Andreesen Horowitz invest much smaller amounts of money in many more companies at earlier stages of maturity. Yes, venture firms that actually invest in start-ups.

They handle the investor productivity issue by spending less time in taking board seats, focusing only on what they know best, and having a professional staff which is really current in the industry.

The capability of the people in the firm matters a lot. Many of these new firms are shying away from the young MBAs being put in significant governance positions when most of them have never run a company. They cite too many bad decisions have been made by people who really don’t have the appropriate background. Their advice for young MBAs is to get a job in an operating company and learn the ropes before trying to become a venture capitalist.

Being current in technology is probably more important than many years of experience. Although both are important ingredients in a company, they cite the fact that too many companies are being run by people who have lost touch with technology. We are in a very dynamic and changing industry. Staying current means you have to pay attention to it every day.

About the author: Bill Warner is the managing partner of , a business consulting firm in the Research Triangle Park area of central North Carolina, and is the chairman of the , an angel investor network with more than 100 members throughout the Southeast.