From Detroit's union halls to its boardrooms, the consensus belief is that billions of dollars in federal investment and loans kept the American auto industry from collapse.

But drive up Silicon Valley, and you hear a sharply different -- and far darker view -- from some of the world's most prominent venture investors.

The U.S. auto industry, they warn, remains too wedded to a dying business model and too out of touch with the sources of innovation to become competitive again.

Instead, they look for a new group of upstart companies to shoot to prominence and profitability, eclipsing the automakers once known as the Big Three just as Google Inc came from nowhere a decade ago to eclipse established technology companies.

I do not believe that the U.S. auto business can be competitive, said Ray Lane, Managing Partner, Kleiner Perkins Caufield & Byers. I don't see any of these new car companies based in Detroit.

Lane, who is backing plug-in hybrid carmaker Fisker Automotive that is planning to launch a $39,000 model, said Detroit has lost its entrepreneurial spirit.

For years they have been led by accountants and lawyers, not engineers and entrepreneurs, Lane said. That's OK if the industry isn't changing.

So, what do the three U.S. automakers need to do to get back their once-dominant position in the marketplace?

Start over, said Marc van den Berg, Managing Director of VantagePoint Venture Partners, which backs high-profile electric carmaker Tesla Motors and electric vehicle infrastructure firm Better Place.

The U.S. auto industry has been hit hard by high fixed costs and plunging sales in the past year. Even after $3 billion in federal trade-in incentives helped stabilize the market in recent months, overall sales remain down 28 percent.

General Motors Co and Chrysler have been put through federally sponsored bankruptcies and restructured with $60 billion in federal funding.

Even Ford Motor Co, which avoided bankruptcy, is counting on government support in other areas, including nearly $6 billion in low-cost U.S. loans to retool old factories.

The only way to succeed is by a complete overhaul of the business model, where the carmakers move beyond just designing attractive cars, Silicon Valley venture capitalists say.

There is room for business model innovation and technology innovation, said Vinod Khosla, Managing General Partner of Khosla Ventures.

Khosla said U.S. automakers need to embrace innovation at all levels, giving as an example Better Place, which is building out charging infrastructure and battery-swapping stations for electric vehicles.

Better Place is saying don't let the consumer buy the batteries, said Khosla. That's a business model innovation.

There's lots of such innovation possible, he said.

THINK GOOGLE, AMAZON

The Silicon Valley financiers have high stakes in the transportation sector and are looking to herald the next wave of innovation in cars.

Khosla, famed Sun Microsystems co-founder, is backing a number of biofuels makers including Coskata.

His former firm Kleiner Perkins, a prolific fund that backed now-household names such as Google and online retailer Amazon, has set its sights on the green technology sector with bets like Fisker and fuel cell maker Bloomenergy.

Kleiner Perkins' Lane said both Google and Amazon were spectacularly successful more due to their unique business model rather than technology.

Amazon is an innovation in business model, not in technology, he said. It was nifty technology that Google had developed, but there were 10 others that had technology.

It was innovation in the business model that produced the value in Google, Lane said.

Raj Atluru, managing director of another Silicon Valley venture capital fund, Draper Fisher Jurvetson, said big carmakers would still exist, but new names will herald change in the industry.

Tata Nano is going to change the entire supply chain. They are changing the economics, Atluru said. Chery has gone from a start-up automotive company to $6 billion in revenue.

Draper Fisher, which has brought industry-changing companies like Internet phone company Skype and Internet mail firm Hotmail to the marketplace, is betting on low-cost Indian electric car firm Reva.

Chery Automobile Co, China's biggest carmaker, is among the growing ranks of Chinese firms with global ambitions while India's Tata Motors has already taken the market by storm with its $2,500 Nano small car.

Lane said a number of changes are coming to the industry, including efficiencies in power train and electrification.

The changes will set us up for the next 50 to 100 years in a totally different industry than the one that was created in the last 100 years, he said.

(Reporting by Poornima Gupta; Editing by Phil Berlowitz)

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