The notion that the business of venture capital is broken is one that I’ve discussed multiple times before.

In short, I (and many others) have observed a major problem with venture capital in recent times – too many VCs with too much money chasing too few “good” opportunities.

For the first time in a half century, the numbers leave no doubt as to this truth.

At a recent Harvard Business School presentation entitled “The Canarie [sic] is Dead,”’s Adeo Ressi showed off a slide that has caused quite a bit of buzz.

It shows that, by the National Venture Capital Association’s estimates, VCs have raised more money from their limited partners so far this year than they have produced in returns from exits.

In other words, limited partners are now paying for VCs’ dinners; VCs aren’t paying for their limited partners’ dinners.

Of course, everybody has an opinion as to why this has happened.

Ressi argues that:

  • Money doesn’t get where it needs to go. He believes that less than 10% of the companies that need capital get it.
  • The fundraising process is a distracting. It’s too complicated, takes too much time and hurts momentum.
  • The industry simply doesn’t generate returns. According to recent NVCA data, a paltry 13% of VC-backed companies have exited.
  • Investments are “highly concentrated.” He observes that a handful of industries receive the bulk of the funding and there is no shortage of “me too” companies that are funded.
  • VCs invest in industries that they know nothing about. He cites the billions invested in biofuels, an area which most VCs have no real experience.
  • Expectations are too high. In short, they’re downright unrealistic.

Others suggest their own reasons for the VCs’ woes.

VentureBeat’s Matt Marshall argues that venture capital is suffering because:

  • It’s really a niche industry that attracted too much money with initial successes like Intel, Cisco and Genentech.
  • Major companies like Microsoft and Google have become smarter and often scoop up promising startups early on before they have the potential to grow into the types of mega-businesses that VCs have relied on to generate returns.
  • VCs have become greedy and because they earn management fees, have an incentive to raise increasingly large funds even though the market itself may not call for funds of those sizes.

And, of course, there are those who blame government policy. Prominent VC Tim Draper told Marshall:

“It wouldn’t be a bad idea to spread some VC good will around about now. Washington could stand to hear about Venture Capital job creation and wealth building. After all, ours is the asset class that may be able to pull the US out of this mess. You might also go on an anti-Sarbox rampage. That might be the regulation that has sucked the most value out of the entrepreneurial economy in the last 5 years.”

His sentiments are largely echoed by “Silicon Insider” columnist Michael S. Malone.

Frankly, I think Ressi and Marshall are closer to reality than Draper and Malone.

The bottom line is that there are great young companies out there working on great things. Access to capital is an important part of ensuring that they have the ability to realize their potential.

Yet if you look at venture capital in recent times, it’s hard to blame the failures of the industry on anyone other than the people who run it.

In the Internet space, a sizable chunk of total funding last year went into a handful of startups (including Facebook, Ning and Slide) whose business models (or more appropriate, lack of business models) many have questioned.

In the “cleantech” space, billions have been thrown at startups that are likely to fail by VCs who have fashioned themselves modern-day John D. Rockefellers even though the only thing they really know about “energy” is that their Maseratis are supposed to be filled up with high-octane gasoline.

The irony in all this is that VCs have made it a habit of playing up their role in funding disruptive startups that change stodgy old industries and force entrenched, dinosauric companies to adapt or die.

Yet the results tell a different story.

To adapt a speech given by the fictional “corporate raider” Gordon Gekko in one of my favorite movies, Wall Street:

“The venture capital business, Mr. Draper, the venture capital business has thousands of firms. Now, I have spent the last two months analyzing what all these firms do, and I still can’t figure it out. One thing I do know is that your industry isn’t producing results, and I’ll bet that half of the money raised was invested in startups that were never viable in the first place.”

“The new law of evolution in venture capital seems to be survival of the unfittest. Well, in my book you either do it right or you get eliminated.”

Now that VCs are officially taking in more than they’re producing, many do risk the fate of elimination. After all, one can’t expect this trend to continue unchecked forever.

Either VCs will adapt and realign the way their industry works with the fundamentals of the market or they’ll increasingly get cut by limited partners, many of whom have been hammered badly in the financial crisis.