The end of venture capital as we know it

Highland Capital founder Paul Maeder points to: a broken model; the end of an innovation cycle

If you hang around enough technology conferences with bankers, entrepreneurs and venture capitalists, you'll hear a lot of grumbling about the state of the venture capital industry and how it's broken. After all, the venture capital narrative recently is generally one of over-investment and a deadend exit environment. 

While there are positive signs that public investors may embrace startups once again as OpenTable managed to go public last week, the IPO freeze has yet to thaw. Only half a dozen venture-backed startups went public in 2008, the lowest level since 1977, according to the National Venture Capital Association.

But even if the IPO market came back, the changing sentiment toward investments among the venture community is indicative of a larger shift. There is a profound underlying reason that goes beyond today's economic crisis that's causing angels, corporate venture capital and hedge funds to pull out of venture investments. 

That reason is that the current innovation cycle is coming to an end, ushering an evolution of the venture industry as we know it, according to Paul Maeder, general partner and co-founder of Highland Capital Partners, a venture firm started in 1987.

"We have to get back to funding smaller, more lean, more capital-efficient companies and fewer of them in each market space," said Maeder, who spoke at AlwaysOn Venture East Summit.

In other words, the end of capital-intensive innovation is over.

"It’s [betting small] a function partly of the economy and partly a function of where we are in the cycle of development of industries," said Maeder. "The microprocessor revolution that started in late 70s and early 80s and gave us the semiconductor industry and software industry, mini-computer industry, work-station industry and personal computer industry and ultimately gave rise to the Internet – and all of the transformation that that begat, that cycle is getting mature. The venture industry is retooling itself for a new set of challenges – some around clean tech and other industries."

Maeder expects that a number of venture funds will disappear and that the venture capital industry will contract for the next few years. His prediction is that the amount of venture capital invested annually - which was some $30 billion in 2008 - will be cut in half.