Everybody loves making money. Even better is when money breeds more money. That’s the secret behind the success of venture capital. Today, venture capital-backed businesses have created more than 10 million jobs and generated more than $1.7 trillion in revenue since 1970.

What started out as a cottage industry in the early 1970’s has matured into an asset class backed by large institutional investors and pension funds. According to the National Venture Capital Association, the industry watchdog, the average size of a venture fund was $145 million in 2003. This compares to an average of $30 million in 1985. Today, there are approximately 700 venture capital firms in the U.S. managing around $252 billion.

While the growth of the venture capital industry has spread to all parts of the world, it is a particularly American breed of capitalism. Not surprisingly, it has deep roots in the West, Silicon Valley to be specific. The high-risk model takes a poker players love of gambling and the frontiersman’s delight in pushing the limits. The pay-off, when it hits, is not just big, it is almost obscene.

The success of the industry is mirrored by the success of its start-ups. Venture-backed companies such as Dell, Intel, ebay, Amazon, and Fed Ex are household names. Even the government is getting in on the game. While the Small Business Administration has always been a resource for start-ups, the CIA started its own venture capital firm, In-Q-Tel, in 2002 . Just last month, NASA announced it would use the same model for a new fund in the making called Red Planet Capital.

Even the magnificent failures of the dotcom era—who can forget Pets.com Super Bowl ad—did little more than cool down a blistering pace. But in spite of the relative strength of the economy, and maybe because of it, the marriage between venture capitalists and entrepreneurs may be on the rocks.

It is getting increasingly difficult for entrepreneurs to raise seed stage venture capital. As the model matures, venture capital is losing some of its appetite for risk. Typically, a VCs invest more money at later stages these days. With so much capital that must be put to work, VC’s are targeting $10 to $20 million opportunities. To mitigate their own risk and to further bolster the advantage of the company, VCs are moving toward syndicated deals where multiple VC firms participate, splitting the cost of the round of investment and leveraging the considerable contacts represented by the group.

More money and more players mean higher demands. Early stage companies lack the track record now required to attract venture capital. Gone, hopefully forever, are the days of ideas on cocktail napkins. But the spirit behind the cliché was the VCs willingness to buy an idea. Now, companies must produce not only prototypes but referenceable customers and a competitive advantage that assures its place as the market leader. In this brave new world, there is no room for number two or three.

The changing demands of the VCs have created even more of a challenge for entrepreneurs looking for $50,000 to $1 million start-up financing. One resource is angel investors, individuals who have made their fortune and are looking to mentor entrepreneurial enterprises. Even though angels pre-date venture capitalists, the depth of their pockets have not altered significantly. A typical angel investment is between $50,000 and $100,000.

Finding an angel can be difficult. Successful entrepreneurs are relentless in using their social and professional networks to identify likely targets within an industry. There are also various angel networks that meet to hear pitches. Though these networks can produce results, they are often well-intentioned, but poorly orchestrated attempts to wrangle individual angels into a collective deal. It is difficult enough to manage the expectations of one investor and impossible with ten or twenty.

There is some good news on the angel and venture capital front, however. Alan Patricof, one of the grandfathers of the venture industry, just announced that he will step down from his venture empire Apax to return to his roots. He has raised a $100 million fund to invest in the $500 to $3 million range. Similar venture-type operations are emerging, raising capital from individuals instead of institutions. This new old-fashion venture capital play is poised to play a significant role in the discovery of the next wave of innovation.

investorless money is another option. Funding from federal or state or local research grants is highly competitive but has the distinct advantage of being relatively free. However, not all grants are appropriate for start-ups. National Science Foundation grants, as is typical of most federal technology grants, are mainly directed at scientists working within a university. Some require matching funds from the host institution. Other problems can arise regarding the intellectual property derived from the research.

Another resource is the SBA’s Small Business Innovation Review (SBIR) program and the Small Business Technology Review (SBTR) programs. In 2004, the SBIR funded more than 6,500 awards for approximately $1.867 billion dollars to small high technology firms. That same year, the SBTR, which focus on small high tech firms that partner with non-profit R&D institutions, granted more than 850 awards totaling $184 million.

There are other grant sources from various foundations for companies that are developing products and services that meet particular needs. Foundations such as the American Foundation for the Blind may partner with a start-up developing enhanced voice recognition software, for instance. The key for entrepreneurs is to be as creative about the approach to their funding as they are about the ideas they are looking to finance.