The venture capital business is in the middle of a shakeout.

For too long, venture’s been over-funded and over-staffed with homogeneity:  the same kinds of partners, operating with the same fund model, looking at the same investments, in the same markets.  It took an economic meltdown for LPs to finally realize they were putting money into an asset class that wasn’t generating a return commensurate with the risk.

Because of the typical 10-year agreement terms in venture partnerships, everything happens in slow-motion.  But there’s some early evidence things are breaking up:

• Venture firms cutting back on partners, or moving some partners to “venture” partners
• Top-tier partnerships having a hard time raising new funds (and coming in below target), and 2nd-3rd tier partnerships having an impossible time
• LPs missing capital calls (a very big deal)

Partnerships getting hit the hardest:  those without some recent distributions (some are rumored to have nothing in the past 7-9 years!), those with no previous funds beating T-bill IRRs (or even showing a positive return), and those with heavy university endowment LPs (which have gotten slammed).

I don’t wish ill-will on any of my venture friends, but I think this is good for everyone in the long run:  we’re flushing out a broken, over-capitalized, me-too industry.  Hopefully we’ll see some innovative fund models, looking at new markets, and funding companies in new ways.