I had a chat with Benchmark Capital general partner Bill Gurley this week about his investments, the Valley, and the state of innovation, et cetera. Gurley's a great person to check in with now and again because he often sees things that others don't. A former analyst and engineer, he has a way of sizing things up that makes him both intriguing and highly quotable. But on this day, when I asked him to talk about the state of the VC industry, he turned dour. "There's too much private equity out there. It concerns me that when you over-capitalize entrepreneurs, they tend to make worse companies. They're trying to beat each other and use the capital to do that. And 70 percent of venture investors have been VCs for less than two years. We've all seen how this movie ends. "

The first time you hear this kind of talk from a VC, it sounds rather shocking -- someone in business is actually being honest about the prospects of his business. Then you realize this is what VCs do. Maybe it's a ploy to try to get more for their money or weed out weak competitors, or maybe it's just plain bitching. But it seems nearly impossible to get even the best VCs to say anything positive about the profession that has awarded them with Ferraris and private planes.

Having said that, Gurley's right, as usual. It's clear that the VC model is going through upheaval. There's an incredible fever of entrepreneurism in the Valley these days, but it takes less money to start a company, so entrepreneurs need less of it. This not only raises the prospects for angels, it opens a clearer path to profitability, which means VCs face challenges from both ends (short-term profitability is not generally a good thing for the VC model). First, they have to compete with the little guys for investments. George Zachary told me on December 2 that he was meeting 5-10 companies every day until Christmas, logging 16-hour days, seven days a week, trying to land the best investments in the consumer Internet space. But then what? Zachary can only sit on so many boards. And how does he cash out of his investments with little hope of an IPO? A $10 million Google aquisition doesn't mean much to a VC.

Paul Saffo told the San Francisco Chronicle this morning that, "We will see more changes to the venture capital model in the next five years than we have seen in the last 25."

Saffo's not one for under-statement, but in this case, I think he's being conservative. The venture capital model has been stagnant for at least that long, and the change that's happening now is dramatic. Gurley thinks we've seen how this movie ends, but I'm expecting a plot twist this time around. Last time, it ended with carnage in the public markets. This time the carnage will be more contained.

VCs have always looked for creative destruction. Now creative destruction is finding them.