But during a speech Friday at the IBF Early Stage Venture Investing Conference in San Francisco, Moore acknowledged that his thesis would not apply to the user-generated content sites that are at the heart of Web 2.0. While venture capitalists have at times invested profitably in these second-generation firms, that success is akin to a blind squirrel finding an acorn--more a matter of luck than skill, he said.

One reason the old model no longer works is that Web 2.0 companies rarely struggle to achieve scale the way companies like Amazon.com Inc. once did. "We thought we knew what a hockey stick was," said Moore, referring to the sudden and sharp increase in growth that tech, and especially Internet, companies experience once they hit a certain scale. Web 2.0 companies, by contrast, often achieve exponential growth almost effortlessly. The challenge they face is what he called a "monetization chasm."

A classic error for Internet startups is to introduce a business model either too early or too late. For instance, moving to a subscription model can stifle growth or even kill an already popular service by alienating customers. As such, to get in on the ground floor with a Web 2.0 startup, VCs often must invest in a company that has yet to thrash out how they're going to make money off their business. That's a big gamble, Moore said. What's more, user-generated sites flourish not on the strength of their business models, but rather on their cool quotient, and "VCs are not cool," he noted.

"Talk about what keeps you up at night--this is a terrifying thought," Moore said. "VCs are mystified by cool. They don't teach it in business school."

One way to navigate these new challenges is to invest either in very early-stage companies, where the risks are lower, or in the very late stage, where the monetization plan is clear and where revenue and profit forecasts can be made, Moore said. And mid-stage companies? Run like the wind. -- Andrea Orr