It's admittedly a warning that's been circulating for a long time now without ever seeming to lead to much, but venture buyout investor Terry Garnett (pictured) sounded another alarm about the unsustainable economics of the VC sector on Wednesday when he said it was "perplexing" that so much money continued to flow into venture capital.

Citing some gloom-and-doom forecasts that the roughly 1,000 venture capital firms operating today should contract to about 100, Garnett said "that's probably not too far off the mark." Garnett, himself a former venture capitalist with Venrock Ventures who went on to co-found the venture buyout firm Garnett & Helfrich, which spins out businesses from global companies, said the venture model simply did not support the $35 billion of new investments that was poured into startups last year.

Behind some of the highest-profile Web 2.0 startups, he said, there were a host of other startup companies receiving funding but generating a lot less hype and standing less chance of succeeding. The result: "an incredibly bifurcated model" in which the very top tier of VC firms do well and all the others lose money.

Another problem to hit the industry recently is the tough economy, which in turn has stifled the flow of engineering talent to the startups that needed it most, he added.

"For the engineer at Juniper or the developer at Oracle, they are very gun shy about stepping out to work for a startup," Garrett said . - Andrea Orr

See Aug. 3 interview with Terry Garnett from TechTicker.com