The No. 1 job for venture capitalists is to deliver returns to investors, and the primary industry benefit is private-sector job creation. In order for the VC industry to be successful in these areas, however, the traditional startup venture investing formula needs a rethink.

While the economic environment may have improved during the past year, optimism is cautious and not universal. According to the 2011 Venture View predictions survey, which was conducted by the National Venture Capital Association and Dow Jones VentureSource, VCs are divided on how fundraising will trend in the forthcoming year. More than half of VCs expect venture capital investment to pick up in 2011, while about one-quarter expect investment to remain the same. 24% of VCs expect investment to decrease.

Against this backdrop, the industry must abandon the earlier "boom or bust" mentality that assumed one "home run" for roughly every nine write-offs. Indeed, today's portfolio managers must be less concerned about business cycles and more focused on capital efficiency. There are still too many funds in Silicon Valley and too much money being allocated on a per company basis, with significant implications for the VC industry and beyond.

The reality of the past decade of venture investing is that most early-stage ventures achieve 5 times on exit, or less -- not the promised 10 times. Plus, they're exiting later (eight to 10 years, on average) and eating up more capital during their extended stay. The industry needs a fresh approach for sober times. Meanwhile, early-stage investing has become increasingly crucial for private-sector job generation, upon which so many governments are basing their recovery. VCs must go beyond rate of return on investment to address issues including job creation and global commercialization of groundbreaking technology, while also facilitating exits.

One way to do this is to restructure the portfolio model. We believe funds will gravitate to pre- and early-growth-stage profiles with maximum size of perhaps $300 million to $400 million, although $150 million fund sizes will also be more common. These smaller funds will need to achieve a greater number of 3-times to 5-times multiple returns (known as "singles") more quickly, while delivering fewer, more carefully funded "home runs." To do this, each portfolio company must initially be funded as though it will be a modest success. In other words, it is important to fight for each portfolio investment in pursuit of a clear exit point in the 2-times to 5-times range, then evaluate which ones have home run potential and fund them accordingly, and write off the ones with insufficient prospects.

In contrast, many firms still fund their portfolio companies as though each will be a home run, even though they assume nine out of 10 will be losers. Risk and big write-offs can be significantly reduced by assuming a majority of "singles" plus a home run or two. Yes, VC firms still need home runs to drive desired overall fund returns. Ideally, we'd like every investment to be a home run, and only invest in companies with home run characteristics, including a large and growing total addressable market, differentiated products and technology, and other attributes. However, if a home run is not realized, a portfolio should still be able to achieve positive internal rate of return.

The key is not to fund companies so heavily that a $50 million to $150 million exit yields a breakeven versus decent "single or double" ROI. With enough capital efficiency, it is even possible to find an exit in the single or double range with 10-times home run yields, or better. This capital-efficient model also requires that home run-level investment decisions be made after the initial investment -- not before. Making these decisions prematurely is no more effective than picking winners by throwing darts at a board. Successful home run outcomes are built on far more than speculation.

A more capital-efficient investing model is also the best way to make VC truly competitive and successful in Europe, where the number of funds continues to decline. And it's the right strategy for Israel, where the number of deals and amount of investment has dropped dramatically as compared to prior years. Many promising startups can be found in both regions, and then bolstered with a Silicon Valley presence and talent to help pave their road to a successful exit.

And exits do look more attainable during the coming year. According to the 2011 Venture View survey, two-thirds of VCs and 44% of CEOs anticipate more venture-backed companies going public, while 81% of VCs and 82% of CEOs expect more acquisitions in 2011. More than half of both groups expect initial public offering and acquisition quality to improve or remain steady in the coming year.

Obviously, deciding how much to invest in which companies, and when to drop, exit or take them all the way to the end, are difficult judgments. It requires extensive experience executing many successful exits across a large number of investments. Successful managers specialize in sourcing and leading successful investments. They know how to build value with proprietary expertise and connections, and they have insight into global target areas, best-of-breed investments and emerging markets. The best managers also work in "pockets of potential," which we believe currently include energy efficiency, consumer and mobile IT/software, and Web/new media and home applications. The 2011 Venture View survey respondents highlighted consumer Internet and digital media (82%), cloud computing (80%) and mobile/telecom (66%) as the investment sectors they anticipate will increase in the year ahead.

Clearly, it is no longer "business as usual" in the VC industry. Many knowledgeable observers anticipate that several household name VC firms will either close funds or raise much smaller ones, leading to major layoffs. But VCs who follow a new, more capital-efficient investment model can continue to create jobs and commercialize groundbreaking technology while also delivering exit ratios and IRR well above the industry average.

Kent Godfrey is a general partner at Pond Venture Partners Ltd. Dividing his time between Europe and Silicon Valley, Kent has more than 25 years of executive management, strategic planning, sales, marketing and business development experience in the high-tech industry.