DeVore

Are the paths of the venture capitalist and entrepreneur diverging? To hear the speakers at last night's Seattle Tech Startups meetup one would certainly think so.

Chris DeVore, the Seattle angel investor and managing director of Founder's Co-op, got things rolling when he delivered what had to be the line of the night. In describing the troubles plaguing the venture business, DeVore noted that venture capital firms lost touch with early-stage entrepreneurial ventures as their funds ballooned in size and Web-based software caught on.

"It feels an awful lot like a terminal misalignment of goals and expectations between what a VC fund's partners are trying to accomplish and what a startup is trying to accomplish," said DeVore.

DeVore -- who previously co-founded the venture-backed startup Judy's Book -- later explained that venture capitalists face a challenge trying to make early-stage bets on companies.

"The dirty secret with VC firms is: the more money you raise, the more money you make," said DeVore, noting the two percent management fee that venture firms typically pull down.

Michael Schutzler, an angel investor in Seattle who previously served as CEO of Classmates.com, spelled it out even more clearly during his remarks.

"It is a really crappy time to be a venture capitalist," said Schutzler, noting that the venture capital business is "collapsing." He pointed to the slumping returns and the lack of IPOs, noting that 2008 saw the lowest number of IPOs since 1974. Last year wasn't much better with just 11 venture-backed IPOs.

"There are not a lot of happy conversations with limited partners right now," he said.

But Schutzler thinks there's still room for entrepreneurs to succeed and raise money. The changing market dynamics for VCs is a good thing, he said, because it creates "swirl" and "confusion."

"It creates massive competition for whoever is left," he said. "What has happened right now is there are partners who have been sitting on the sidelines for a year and half ... and that's why they are picking up the phone on January 4 saying 'So, how is your company doing? and 'How are you doing on those numbers?'

Schutzler

Anyone who is starting a company is finding a more receptive audience because the venture capitalists need to deploy capital, he said. Schutzler added that Google and other high-tech companies will be looking to make acquisitions in 2010. And -- if Facebook goes public -- that could create a "wake" which brings others high-tech companies into the public marketplace.

Bill Bryant -- the Seattle venture capitalist and angel investor whose helped bankroll and start companies such as Visio, Qpass, Netbot and Isilon Systems -- is certainly aware of the divide happening in the venture capital and startup communities. And it was on full display for him last night.

The venture partner at Draper Fisher Jurvetson spent the early portion of the evening at a posh dinner hosted by investment banking firm Goldman Sachs for up-and-coming companies in Seattle.

Then, he cruised over to the University of Washington for the Seattle Tech Startups meeting -- a jeans and beer drinking crowd.

"This is a tale of two cities," Bryant told the crowd of about 50 early-stage entrepreneurs.

Bryant was blunt in his assessment of what venture capitalists bring to the table. In his words, not much.

"I don't believe at all that investors have anything to communicate to entrepreneurs that's valuable in terms of what they should be thinking about," Bryant said. "We are not domain experts. We don't think about the markets and problems that you are obsessing about seven by 24. And anytime that a venture investor tells you about something that is hot or not, you should take it for the value that you pay for it. It was free, and you should value it accordingly."

He continued with his analysis, noting that "venture investors are a mile wide and an inch deep." And he said they like to chase the popular trends.

"I would absolutely tell you that thematic investors are the worst investors in the world because we are chasing last year's hem lines," he said. "It is like, the mini skirt is in, so we want to invest in mini skirts.... Investors are a horrible barometer of what is going to play in the next couple of years.... We absolutely rely on entrepreneurs to come up with innovation and to create the breakthrough ideas."

Bryant then challenged the audience to think about game-changing ideas, rather than "me-too" concepts.

As far as the IPO and M&A markets improving in 2010, Bryant doesn't think so. "Exits are horrible, and I don't expect them to be significantly better this year," he said. "Statistically, over the last two years now, exits have been the worst they have ever been."

Bryant

With just 11 venture-backed IPOs last year, Bryant took issue with Schutzler's comments that the exit market is becoming more favorable. "I don't believe that is a trend that's in favor of entrepreneurs," he said.

Nonetheless, Bryant said that Draper Fisher -- an investor in SpaceX, Tesla, Opscode and others -- is still finding "change-the-world style projects" that require venture capital dollars. (In fact, he's currently tracking four companies in the Seattle area that fit that bill).

In his view, the venture capital business will follow the path of other professional services such as law firms and accounting firms where there are big players on top and small, niche players on the bottom.

"The guys in the middle will be highly challenged," he said.

(Slides from DeVore's talk are here).

John Cook is co-founder of TechFlash. Follow on Twitter @johnhcook.