The socially mediated wireless Chinese cloud. This about sums up the tech industry today. Run, run at full speed and if you stop to tie your shoe you end up at the back of the pack. Dern!

Bill Gurley, a partner at Benchmark Venture Partners, was the keynote speaker at the AlwaysOn venture summit and he looked out over the crowd and said, in essence, that up to half of the venture firms will be folding in the next little while and that little while is a very little in this new rat race. Oh heck, just when I thought I was winning the rat race they brought in faster rats!

The reason for this was not obvious to me until he explained the Yale Model of institutional investing. It seems that the endowments of some of the powerhouse universities and other institutions saw fat profits in what has been called “alternative investments” these being the illiquid ones from timber and real estate to venture funds. Then came the crash in values all around the world and the endowments were stuck with assets they couldn’t sell or had to dump at a huge loss. In fact, Harvard has been one of the hardest hit (11 billion down from 26 billion) and they have had to cut back on some of the ivy covering the buildings. This is quite true as there is a multibillion-dollar science building that has been halted in mid construction. Ouch.

And some entrepreneurs are looking for funding from places other than venture firms for funding. Because it takes less capital to launch a firm today than it did ten years ago the angel investor is pretty busy. Not only that but there is funding from large corporations who are becoming more vertical like Cisco and even the CIA, as they fund projects that can benefit them. It doesn’t’ stop there. HP is doing it but, get this, so is Best Buy and Proctor and Gamble. This makes some sense but it is strange to think that you can go to a Best Buy and pick up much of the gear to launch your startup and they will pay you to take the stuff.

I met the top brand manager at Proctor and Gamble back in early 2000 when Tim Koogle and Jerry Yang had the bizarre notion that I would make an ideal keynote speaker at a national Yahoo conference where brand managers would come from all over and explore how they could be part of the Internet revolution. Tech companies were side by side with Taco Bell. How do you put a taco online you ask? The answer is you couldn’t then but now they can with the new social tools like maps and Twitter. P and G actually opened an office on Sand Hill in 1999 but soon closed it. Now they are back and their cash is the old fashioned kind, large and liquid.

I see the venture industry as having followed the same path as the motion picture industry in the last century. Early on there were a smattering of small studios and then bam, a gold rush. But most studios lost money and closed, leaving a few big operations and a lot of small independents. Like the film business the venture business had always been about home runs and as in baseball most pitches do not score points.

David Cowan at Bessemer Venture Partners said that one thing limiting his ability to uncover and fund new ideas is that the top VC’s are overloaded with inventory and sitting on all the boards as well as providing the guidance that they have been brought aboard to do takes a tremendous amount of time. Leave the nest already! And since new deals are slower in arriving it becomes hard to justify bringing more folks in into the venture firm.

David raised another interesting point that in the current climate there are a great number of clean tech companies being funded and unlike software they are building tangible products that take a lot more money to build. If you extend the capital requirement graph of all the clean tech firms you will see a monster delta between the amount of possible capital and the need. So most of these firms are just not sustainable. Deepak Kamra of Canaan Partners brought up the fact that it takes 9 years from inception to an exit. During this period follow on capital and VC expertise has to be continually pumped into the startup.

Tim Draper of Draper Fisher Jurvetson Venture Partners talked about one of his favorite subjects, China. Tim is the ultimate free trader and he and his partners were an early investor in Baidu, the Chinese search engine and the only one that gives Google a run for its money. Where a lot of American business folks approach the Chinese dragon with trepidation, Tim respects them as fearless, confident and tough. He feels that we have in them worthy partners that will make us better if we stand up in the marketplace with the same attitude.

But with all this, the mood is one of cautious optimism. Back at the beginning of the decade the VC and techfolk in the Valley seemed a bit depressed and even though it has picked up some in the last few years it is still very hard to make money in the VC game. This is because the upside is not realized until there is a way to fully capitalize the company. In the real world most everything is about showing up but in the VC world it’s about the exit. There has to be a stock offering or the firm has to be sold before there is dime one to the VCs and these events are far less common than 10 years ago. Sometimes neither strategy is possible and the firm is held as private equity with a much slower trickle of profits from operating income. Of course the worst scenario is that the firm folds and generally all is lost at that point.
In The Valley you hear a lot of talk about failures being celebrated. You hear people actually saying it is good to fail that it teaches valuable lessons and so on. This is crap. Sure you can learn from failure like if you slam our fingers in a door you learn not to do it but believe me the better lessons are from success. It is far better to be like the founders of Google. Succeed at the first thing you try. Now that’s a lesson!

Back at the AlwaysOn conference I found myself surrounded by biz school types. Now I feel about advanced degrees for business about like I view cooking school for chefs. The real world has far more to teach than business school. But if you have time to kill by all means hang out in school. If you have an MBA and you write about business and you are full of hot air people will think you’re an idiot. But if you haven’t got an MBA and you run a restaurant and you write about business you are merely considered colorful.

So what’s with these VC types anyway? Are they a bunch of wealthy geniuses who have offered up the capital to bring us a new age, an age as significant as when Gutenberg pulled his first page from the press but muuuuch faster? Well yes, that’s about it.

In fact a little history is warranted. Gutenberg was a failed mirror polisher back in the 1540’s. His idea was to manufacture and sell penitent mirrors (a small polished metal disc on a stick) which were taken to witness a holy relic and, like a nonworking camera, the pilgrim brought the image back to his village. Even the limited mind of a Dark Ages plowman wouldn’t fall for that and the business tanked worse than Microsoft Vista. But his second invention was combining a wine press, easily replicable lead type, oil based ink and a grand vision for a new Bible. He went to angel investors for the research money and in 18 months produced his first page. In short order he printed the most valuable book of all time and everything changed. Venture money made this possible so if you sometimes think that angels and VCs are as useless as shower curtain-ring salesmen just think about how long it will be till you next pick up a device that has been made possible by the quick wits of the entrepreneur and the swashbuckling risk takers on Sand Hill Road.

So today there are reduced expectations and the VCs job is harder. The parties at the end of these conferences are sober, dignified affairs and VC’s look almost dull compared to the old days. I well recall back in the 90’s when angel investor extraordinaire Ron Conway held a charity auction and one item, golf with Tiger Woods with Warren Buffet as the caddy, went for over $720,000. Ahhhh the fun we had.
alwayson.goingon.com to see the conf. video