Venture financings are up. Is this a good thing?

The VC industry may be recovering, but it might actually be healthier for a significant part of it to die.

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.

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About the author

    Matt Asay is chief operating officer at Canonical, the company behind the Ubuntu Linux operating system. Prior to Canonical, Matt was general manager of the Americas division and vice president of business development at Alfresco, an open-source applications company. Matt brings a decade of in-the-trenches open-source business and legal experience to The Open Road, with an emphasis on emerging open-source business strategies and opportunities. He is a member of the CNET Blog Network and is not an employee of CNET. You can follow Matt on Twitter @mjasay.

     

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