I think the binary nature of the VC model is a big part of the problem. I don't know what the alternative's going to look like (crowd-funding?) but right now we have a two-caste system. There are "the funded" and the cold and hungry. The inside and the outside. Losers and winners selected before a single one of either side has had an opportunity to accomplish much of anything. There are a lot of things that could be said about this model, but I think it's pretty clear that it's not good for technology. As we see, most of this bubble is in "social media" VC darlings with mediocre leadership and MBA culture... and still little investment is going into Real Technology startups founded by actual engineers.

A VC cash infusion puts someone from one category into the other immediately. Someone goes from being (in terms of VC-istan social status) a beggar to a baronet in an afternoon. It's really an all-or-nothing game being played. Making it a million times worse is that VCs usually talk to each other about the deals they're making, which means that one VC's opinion influences the multitude. If there were more independence among VC decisions, we'd see an order of magnitude more good startups getting funded.

I think VCs tend to get distracted by their kingmaking powers as well. It's no longer about delivering the best returns for their client. It's about using that magic wand to be "cool" and minting the right baronets, the ones who will use the press access and social status they get from being Funded to make that VC (individually) seem more stylish. Like Tyrion Lannister, they just (::sniff::) want to be loved.