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The problem with current venture funding is that so much money has been lost that many investors are reluctant to get back into the "murky" water with conditions so uncertain. Additionally, they feel much poorer than they did 18 months ago. There is a big overhang of inventory (some salvageable and some not) from the latest era of irrational exuberance. On the professional side, many VCs are struggling to keep the companies they have already invested in alive. A public apology from managers at legendary firms such as Hummer Winblad Venture Partners and Benchmark Capital Partners to their investors is testimony to this.

In the meantime another dynamic is at work. Why invest in a start-up when there are dozens of public companies trading for under $5 and even under $1.00-or even below net cash? Firms like InterNap, Kana Communications, or Global Crossing come to mind. A $25,000 - $100,000 investment in these companies can buy a lot of stock. These companies and their management have already been through the fire. This is one view being expressed by disciplined investors such as Art Lutzke, a former managing director of S.G. Cowan, who now privately invests in early stage companies.

This is not to say that there is no room for the new and the rewards of building something valuable. But this also must be tempered against down valuation rounds (sometimes called "cram downs"), which dilute early investor value. This has been happening frequently because cash-starved companies are "forced" to take whatever they can get in order to stay alive. This also adds risk to early investments.

For other investors, however, this is an opportunity to put money to work. For example, the savvy Adrian Alexander, principal of Technology Seed Capital Partners, LP, is doing this aggressively. According to Mr. Alexander, "the key to making investments in this climate is: 1) to provide sufficient financing for a company to achieve self-sustainability without dependence on an additional round, and, 2) to obtain terms that are so compelling that they can't be left on the table."

So, the message here is that while some entrepreneurs feel bewildered or depressed because the streets are no longer lined with lollipops and gold, smart people are focusing on having the fortitude to develop a very strong combination of 1) a good idea, 2) a strong management team that is really dedicated to the project, 3) providing proof of concept, 4) an openness to outside suggestion, 5) creating real value not just a get rich quick scheme, and, *6) real revenues that are not based on vendor financing or projected earnings but grounded in real sales.

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