Is this financial market mess going to put the nail in the venture community? Thomas Friedman’s recent editorial confused many including prominent investor Fred Wilson and a young writer named Sarah Lacy.  Friedman hits on an interesting angle – we need to look at what is powering innovation. Fred Wilson thinks everything is fine and asks to be left alone, but the reality is that the concept of "venturing" needs to change.  I think Fred is somewhat justified in his opinion – hell things are great for him why would he want it to change.  There is a bigger picture – entrepreneurship is changing and the insular venture capital model is just a niche in the big picture.

Why are people confused?  What to do?  My Angle:  More Venturing is Needed!  Venture capitalists are in the business of venturing so why are most sitting on their hands.

The market of startups is actually expanding not shrinking, and the cottage industry of venture capital is confused.  The transparency and real time information is exposing the new opportunities faster and in public.  The process of "venturing is changing".  I expect that I will continue to see perspectives range from "we’re ok don’t panic" to "we need to do more".  I’m of the opinion that we need to do more.  Today, entrepreneurship is global, open, and faster verses the old way where venture capital has been regional, insular and slow.

Choices need to be made? Limited Partners of venture funds should be freaking out – I would.  The new paradigm rewards efficiency.  The old model of "bogarting deal flow" is at risk.

Today’s Venture capital has been struggling for sometime with only a few small hits and very handful of big returns. The problem is that entrepreneurship is stuck because of venture capital. We need to modernize the venture capital business so entrepreneurs can get busy. I am seeing more early stage creative development then in years past. The entrepreneurial process will never die but it will evolve. These are the pains that we are seeing now with startups. The capital markets are a mess and with no liquidity market today’s venture capital firms are spinning their wheels. The good news is that capital markets are efficient and will work around the bottleneck we are seeing. This NYTimes story is an early indicator that big money will find new homes.

NYTimes had an interesting story a while back on venture capital…

Investors in venture capital and private equity funds who want out are discovering that their stakes are worth less than they paid for them.

As returns on venture capital investments sour and investors’ wealth deteriorates, some of these investors — the universities, foundations and pension funds known as limited partners — have been unloading their stakes in the funds. When they decide they can no longer supply the money they had previously committed, they sell their stakes at a discount to what is known as a secondary firm.

In the second half of 2008, as more limited partners tried to sell their stakes, the price they could get for those stakes fell to 61 cents for every dollar of face value, according to a report from Cogent Partners, an investment bank for institutions looking to sell their holdings on the secondary market. That is down from 84.7 cents on the dollar in the first half of the year and a 4 percent premium in 2007.

A stake in an early stage venture capital fund that has already been fully invested, for example, would be worth 10 to 30 cents on the dollar, Mr. Gull said. “It would have relatively young portfolio companies, some number of them will need additional capital so the fund will get diluted and there are not going to be any exits for some number of years.

A 40 percent loss is no different than investments in the public markets, Mr. Gull noted, and investors would prefer to have the cash. They think, “It’s a sure thing that I can redeploy in some other activity I think has a larger chance for return,” he said.

Mr. Gull said he could not predict when pricing would improve, but his firm is betting that it will not see any meaningful returns from private equity and venture funds until late 2010.