There has been a lot of chatter over the weekend among various bloggers about the need to “disrupt” the Venture Capital market. Some respected people (see here and here) seem to think its time for a new model of funding based around creating a publicly held firm that would select its investments based on what companies its public shareholders found most interesting.

Unfortunately, this proposal ignores some basic realities about business and funding. So, in the fashion of the great Guy Kawasaki, here are my top five reasons why the current VC model still works:

1. Good investments are about more than demand. Companies fail for lots of reasons—bad management, conflicts, poor execution, out-of-control costs. To avoid investing in these kinds of failures, you need to do some up-close, intensive due diligence. Simply having public shareholders vote will not get this for you.
2. The cost to build these new companies are not really that much lower. The cost to build and launch a new web-based service has dropped 10 fold in the last few years. But the cost to build a new business around it has not. Even if you can market cheaper on the web, you now have to operate as a global organization from day one, so it balances out. At some point, to become a large business with some impact, you will need some outside capital. (BOCTAOE)
3. Users are fickle. Public investors are fickle. Over the long haul, the free market may be a good indicator of the future, but at any one point in time it’s not. Just ask anyone who is invested in GE or other old line businesses that are depressed right now because Google is so hot.
4. Investments require a fixed amount of time. The basic economic problem with venture investment (with any investment fund, actually) is the conflict between time and money. You get funded and then you only have a fixed amount of time between everyone in your company to find investments and then keep an eye on them. If you get too much money, you spend less time on each investment and, inevitably, have more losers. The kind of huge money that would come from a public fund would only make this problem worse.
5. The VC problem just might fix itself. As I’ve argued before, I think many new companies, especially internet startups, should build their product first and get a few customers before they expect any VC-level investment. This way, VC’s can see some demand, they can see the management team execute, and they can better judge the company’s chances for success. Could it be that the lower capital requirements of internet startups that seem to make so many people think VC is broken is actually the thing that could help fix it?

Anyway, we are putting our money where my mouth is. Peter, Chris, and I funded our entire business to this point on savings and credit cards, even moving to the Czech Republic for a year to cut costs, so we could bring a product to the market without taking on much outside capital. (We’ve only let one friend invest.)

And now we have a product. Next week, we will get our first customers.

We are talking to VCs right now because we know that in a few months, just about the time we plan to move back to the States, we will probably need their capital to help our business grow. If we do decide to take a deal, we will have customers and a product to show, just like we promised, and the venture capital we receive will go towards helping us expand, just like it is supposed to.

Venture capital isn’t broken. It just needs to be adapted a bit to take advantage of this new model of low-cost startup, higher-cost early expansion.

Bonus Link: See Jeff Nolan’s great comments here.