How long can these good times last? The question dogs John H. Martinson, the newly elected head of the National Venture Capital Assn., a 26-year-old trade and lobbying group representing some 300 venture-capital firms. During 1998, a record $24 billion flowed into VC firms, a 64% jump from 1997 and the seventh straight year of growth in funds at the disposal of venture capitalists, the NVCA data says. That has translated into a huge windfall for entrepreneurs, who soaked up $16 billion in fresh cash last year, with 34% going into the computer software and services companies that are driving the Internet revolution. Another 5% has gone into semiconductors and other electronics ventures and 4.5% into computer hardware companies.

Venture money has backed many of the Net's startup legends so far, including eBay and Netscape. Paradoxically, that worries Martinson. He's concerned that those extraordinary success stories will distort both investors' and entrepreneurs' expectations. "This condition won't last for long," he warns. He should know. As a 25-year investing veteran, Martinson has endured speculative cycles, most notably the biotech boom and bust of the 1980s. "The challenging thing about (being a venture capitalist) is that you cannot hang onto a business," he says. "You're constantly reinventing."

Martinson is founder and managing partner of the $225 million Edison Venture Fund, which invests in information-technology companies based primarily in New Jersey, Pennsylvania, and Washington, D.C. On Apr. 20, Business Week Frontier Online's Dennis Berman spoke to Martinson, who discussed the state of venture capital, his role as NVCA president, and how long the good times can keep on rolling. Here's an edited transcript of their conversation:

Q: What was your first venture investment?
A: A company that made sheet feeders for the first word processors. They worked automatically, so you didn't have to load the typewriter each time you wanted to add a sheet of paper. It was a good success, it went public, and it got me hooked.

Q:Venture capital has changed a lot since then. Most notably, the funds -- and their investments -- are getting bigger. How does that affect entrepreneurs looking for funding?
A:As some funds get much larger, they must raise their average investment. The average deal size is now $7 million. Some must change their strategies to deal with that.

Certainly the "first mover" concept is more prevalent. We're seeing many more big deals where companies are aiming to be the leader in larger emerging markets. [Both VCs and entrepreneurs] are somewhat more willing to compete with larger companies. That's a phenomenon on the Internet, where companies are raising $20 million to $30 million and going public after a year or two. It used to take five or six years. What that leads to, however, as we saw in the '80s, is that there are going to be more also-rans -- companies that don't survive.

Q: How is the success of, say, an eBay [whose stock has increased over tenfold in value] affecting investor and entrepreneurial expectations?
A:It's unrealistic to have that kind of spectacular performance. Even in the Internet world, it is still an exception. We need to still aim for those high winners, but we need to set realistic goals, too -- to base our economic goals on much more realistic models. Still, it's healthy what has happened on the Internet. It has raised the expectation and ambition of entrepreneurs to get ever more creative and aggressive. That has made the U.S. the leader in these new industries.

Q: Are venture capitalists neglecting other growth industries to concentrate on Net investments?
A: Approximately 40% of VC [money] is now going into the Internet, where there are still many creative ideas and business approaches. We're probably starving certain other industries. But that will balance quickly, as certain markets become oversaturated and others underfunded. One of the surprises of the Internet world is that there used to be a perception that it was easy to enter, but to really make a dent requires a great deal of capital.

Q: Is there still room for Internet entrepreneurs to make their mark?
A: They have to pick a unique market and stay focused. If you try to copy somebody else's idea or see it described in the popular press, it's way too late. So many people misplace their energy and capital by pursuing businesses that are actually too mature, even though they're just several years old.

Q: What are your objectives for advancing venture capital as an industry?
A: We need to keep the flow of capital going for entrepreneurs. That's a tremendous advantage we have here in the U.S. What's surprising is that even with the success of venture capital, most large institutions -- pension funds or insurance companies -- are still by policy or regulation restricted from investing in entrepreneurial companies or VC pools. We think of it as an entrepreneurial explosion, but most of the American financial resources are still on the sideline.

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