business

SAN JOSE, CALIF. - Ever since the global stock meltdown of 2008, talk has simmered that the venture capital industry is headed for a shakeout that will result in fewer firms to fund start-ups.

But even as new numbers from the National Venture Capital Association show further evidence of consolidation, it's increasingly clear this will be a quiet revolution, not a bloodletting.

"Venture firms don't really die," said Ashmeet Sidana of Foundation Capital in Menlo Park, Calif. "They just fade away."

With the pension funds and endowments that invest in venture firms becoming more choosy, many VCs are using a variety of tactics to stay afloat until -- they hope -- the stock markets become more receptive to initial public offerings. IPOs are a key route for venture firms to cash out their investments and, in turn, raise new funds.

For now, said Tracy Lefteroff, who heads the venture capital practice for PricewaterhouseCoopers, the landscape is becoming one of haves and have-nots. "The top 20 firms," he said, "provide 80 percent of the returns for the venture market."

The venture capital association estimates that since 2008, the number of active U.S. venture firms -- which swelled during the Internet bubble -- has dropped 15 percent to 462. Given investor wariness, the NVCA predicts that number will continue to shrink.

Many of the firms that remain will have less money to deploy and fewer venture capitalists to deploy it. "It will be harder to get funding," said Dana Stalder of Palo Alto, Calif.-based Matrix Capital.

And while that might mean fewer "copycat" start-ups attempting to ride on the coattails of successful firms, it also means fewer jobs and less disposable income in places where start-ups are concentrated, such as the San Francisco Bay Area.

A new report from the NVCA and a separate one from Dow Jones LP Source both reflect the consolidation trend: While the amount of money raised by VC firms last year exceeded that of 2010, it was raised by fewer firms. In the most recent quarter, the venture capital association reported, only 38 venture firms successfully raised money -- the lowest number in more than two years -- but they raked in $5.6 billion, more than double the industrywide haul during the third quarter. The rich, in effect, are getting richer.

The rush to embrace big-name VCs reflects how lousy financial returns for the venture industry have been in the past decade. The California Public Employees Retirement System, for instance, has seen the value of its venture capital portfolio plunge by nearly $1 billion. As a result, the pension fund announced in November that it will slash the percentage of its portfolio that's dedicated to venture investing.