> $41M distributed among many different startups would be better for the tech ecosystem/community as a whole

In what ways? How would that be true? It's a free market - you get what you can get. You can argue fb doesn't deserve its valuation either, but there doesn't seem to be same amount of disbelief and schadenfreude-seeking.

I am not sure your opinion on the #1 rule of investing applies to Venture Capital considering the primary focus is on the team. Mind you, perhaps this is a reason as to why Venture Capital on the whole has been less than stellar at times.

I believe what happened to Color is that they got tunnel vision on their ideal environment for their product, ad optimised around that - rather than the initial user experience. Specifically, I mean they were using Color around dozens of other users, whereas most new users today use it in their bedroom miles from a second user - so a lot of the UI elements are confusing when no additional data is avaliable. People do make mistakes.

I highly doubt that real "startup people" are that socialist (ie. we should distribute Seqouia et al.'s $41M among many 2-3 person startups vs. a single team of ~30 people).