We are supposed to be in an economic recovery, but the numbers don’t show that. For instance, venture capital funding remained flat through the third quarter of 2010. 

Fear breads caution. It is a simple as that. When a caveman heard the rustling of some large predator nearby at night, he didn’t continue about his business. No, he came to a halt and waited to see what would happen. This appears to be the same exact thing we are seeing in the venture capital market now – massive amounts of caution. 

The numbers through the third quarter of 2010 are not horrible for VC, but they aren’t good either. Firms raised about $9.2 billion for 103 firms compared to $8.9 billion for 105 in 2009. This may seem okay, but keep in mind we were still contemplating falling off the face of the financial cliff in 2009, a total eclipse of the financial world as it were. 

There is little doubt the economy has stabilized. While it is growing at a pathetic rate, it IS growing compared to the last few years when it was contracting. So, why isn’t money rolling into venture capital funds? Well, potential limited partners are very risk adverse at the moment, choosing to stuff their money in the metaphysical mattress instead of risking it on a group of new businesses.

What about moving forward? Can we expect funding to pick up? The answer is tied directly to the economic situation and that situation is not particularly good. The housing industry is being trashed again by the foreclosure mess and a huge number of mortgages are coming due in 2011. Then there is the Federal Reserve. There is a discussion that more quantitative easing [printing money] may happen. Even the threat of this is causing currency wars to erupt as the dollar is driven down in value. Throw in a national debt that is obscene and, well, the picture isn’t exactly rosy moving forward. Given this economic environment, one would expect potential VC funders to be holding their cards close to their vest, which means little in the way of funding. 

The golden years of venture capital are over for at least a little bit. That doesn’t mean you can’t get funding today, it just means the competition for those dollars is a bit stronger.