At a recent event in Silicon Valley, I asked a venture capitalist, "Do you
think the market volatility and lack of IPOs will hurt your business?" While
it was clear he had too much to drink, his answer was clear: "We are focused
on the long term. So we'll win in the end." You have to love VCs optimism.
It's what has led to the emergence of great companies. Yet my venture
capitalist friend should be somewhat worried. You see, it really does not matter
what he thinks about the future. What matters is what his own investors think.
These include pensions, endowments and institutions that are looking for strong
returns. For the most part, they make up most of the funding for VC funds. And
unfortunately, they are getting careful with their wallets. Just look at the
latest VC report from Thomson Reuters and the National Venture Capital
Association. In the third quarter, 52 operators raised $1.72 billion, which was
down 53% from the same quarter a year ago. Now it's true that 2011 still has
seen a strong gain of 26% in capital raised, for a total of $12.2 billion. But
the Q3 figure it was the worst quarterly performance since 2003 could be a
turning point. Keep in mind that since the middle of August, the IPO market has
slammed shut. Even high-profile companies, like Zynga and Groupon, have had to
pull back their offerings. At the same time, this year's deals have been
mostly duds. Take a look at Pandora (NYSE: P ), Demand Media (NYSE: DMD ) and
Skullcandy (NASDAQ: SKUL ), which are all well below their IPO prices. Some IPOs
have hung around, including LinkedIn (NYSE: LNKD ) and
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