Venture capital king Frank Quattrone (the banker behind Amazon, Netscape and Cisco) has a message: IPOs have gotten too big, innovation is being stifled, exits are being delayed and firms need straight-forward advice, not Wall Street “casinos.”

“Wall Street no longer knows how to value,” he complained, during a breakfast talk before 500+  VCs and entrepreneurs at the San Diego Venture Group.

Over the past ten years, the average IPOs is 40 percent below its rollout price, noted Quattrone.  Part of this failure is because of unsustainable trends driven by banker greed. This forces companies to artificially drive big profits and assemble “vertical stacks of technology” instead of focusing on what they might do really well. Citing Oracle’s acquisition of Sun as an example, he said “we’re going back to a world where companies want to do everything.”

It’s a far cry from the 1980s, when a focused company like Adobe could do well with a $5 million IPO handled by small banks such as Hambrecht & Quist. While all the big IPOs are being handled by monster banks today, there’s nothing wrong with using small banks, Quattrone added. “It’s like saying that if you don’t get into Harvard or Stanford, you are going to work in the coal mines.” In fact, he says, there are “plenty of great institutions.”

Quattrone, who recently overturned a conviction for interfering with a government probe into IPO allocation, said he’s through with banking and its broken system and wants t ore-enter the builder class. ”I’ve always been more of an entrepreneur than a banker,” he said (although there are few bankers in Quattrone’s $160 Million per year category).

His new 23 person firm, Qatalyst, will advise firms, including VC backed startups and “tweeners” earning between $1 billion and $1.5 billion per year. His hopes are to build stable relationships with the investment community, rather than the get rich quick mentality of recent years – and ultimately achieve a better track record of successful IPOs.

When eight of ten IPOs can be counted as successful, average financial advisers will be able to recommend them again, he said.  “That’s the key for fund manager influence.” For now, they don’t go near them.

And yes, Quattrone is unrepentant: he still believes that technologically sophisticated bankers should get rewarded for their insights and perseverance with higher shares of IPO allocation than “know nothing” hedge funds.  “Don’t be democratic in your allocations,” he said.

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Money is tight in the VC community for local startups, with the dollar outlay down by 30-40 percent, and money raised just a third of what was raised in 2008, per research by Canaan Partners; There is also expected to be a sharp consolidation among sites that have received funding.  But three top VCs speaking on the “Money Panel” at ILM:09 cited excellent opportunities in specific  sectors of the local ecosystem, including retail, promotions, video and content aggregation.

The challenge is meeting a VC’s standard for advertiser and user volume – always a problem with heavily fragmented local services.Comcast Interactive Capital’s Michael Yang noted that he can’t seriously consider anything with less than one million unique visitors per month. Barring that,  “We’re more apt to sit back and see if you can break through the ceiling,” said Yang, who formerly ran marketplaces for Yahoo.  Still, Comcast is studying the market closely, especially “commerce and marketplace solutions, as opposed to pure directory plays.”

Patricia Nakache of Trinity Ventures echoed Yang’s interest in commerce and marketplace plays.  She noted that most of the attention in local has previously been on Yellow Pages-oriented considered purchase. “What online hasn’t cracked yet is the impulse purchase,” which she calls “the new frontier.”

Citing as a prime example  Groupon, a collective coupon site that just received $32 million in funding, Nakache  said lessons from retail sites are soon going to be widely applied to local promotions and local advertising. She also sees opportunities in verticals and classifieds.  The broad appeal of broad sites such as Craigslist will be complemented by verticals such as Care.com in the healthcare field. “There is an opportunity for a more curated experience,” she said.

Canaan Partners’ Warren  Lee also looked for opportunities with verticals, especially in retail.  “In the same way that ad networks evolved and became more vertical, we’re seeing similar things on the retail side. Broad sites like eBay will either verticalize themselves, or give way to more narrowly tailored sites, “especially as people become more capable of merchandizing things online,” and boost their “sophistication in marketing and attracting consumers.”

Lee says it all comes down to scaling audiences and expenses. He finds aggregated content especially compelling for this reason.  Sites such as Associated Content, Demand Media and Examiner.com, for instance, have really brought out the long tail thanks to the “power of search.”  Associated Content’s articles from 2005 made more money in 2008 than they did when they  were first written, he noted.”It is a sustainable, highly scaleable model.”

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