“Generally speaking there's way too much money in the business,” Fitzgerald says. “It's always healthier when it's a much smaller business.”

Going forward, startups will have to be lean and mean, and “may need to start the company on seed capital or no capital,” he says.

Venture cash invested in Internet companies recently took but Fitzgerald remains confident in the software-as-a-service business model and says that market will drive many new investments. SaaS, the sale of Web-based business applications, offers clear cost benefits compared to business models that require sale of large, expensive software or hardware packages, he says.

“The enterprise software model is under a lot of pressure,” Fitzgerald says. “If you’re selling a big-ticket item, the only way to get that to market is with a direct sales force, and that sales force is hugely expensive to build and maintain.”

While venture capitalists may invest big in software-as-a-service companies, they won’t necessarily swoon over cloud infrastructure ventures, the kind that need massive data centers to deliver raw computing, storage and network services over the Internet, he says.