• GigaOm, Thursday, April 30, 2009 12:15 PM

The venture capital model is failing, and two different groups are promoting two different solutions to the problem, says GigaOm's Stacey Higginbotham. One says VCs should promote smaller initial public offerings, while another says the industry is raising too much money and needs to shrink. Higginbotham agrees with both diagnoses, but thinks that VC firms should brace themselves for a smaller overall industry.

The National Venture Capital Association on Wednesday offered a four-point plan to solve the problem, noting that there needs to be more sub-$50 million IPOs. To achieve this, the NVCA encourages more boutique investment banks and accounting firms to take on smaller IPOs. It also wants banks to boost analyst coverage so smaller companies can get more public exposure from independent third parties. "These steps could reassure buyers that VC-backed IPOs are quality goods," Higginbotham says. The other two steps would require the government to review and change regulations such as Sarbanes-Oxley and to offer more tax incentives for VC investors.

Meanwhile, Fred Wilson, a principal with Union Square Ventures, recently calculated that the current flow of money into the VC industry is actually depressing returns. In short, he said the venture industry doesn't scale. Higginbotham says that both camps are in the right, but the NVCA faces an uphill battle in its attempt to solve the problem of fewer IPOs, mostly because the plan requires regulatory and industry overhauls. If no changes are made, however, Higginbotham says VC investors will start pulling their money, anyhow.

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