What Capital Crunch?

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After Foundation Capital announced its intention to raise a new fund, Grosser says, the fund was "dramatically oversubscribed" within hours. Foundation raises money from the firm's 28 limited partners, which include large university endowments and foundations such as Harvard University, the Rockefeller Foundation, and the MacArthur Foundation. To deal with the unexpected demand, the firm had to raise the allocations for some limited partners while reducing the stakes of others, Grosser says. "On the one hand, [limited partners] say there is too much money out there," he says. "But at the same time they want you to take all of their money."

Spreading Their Bets

Some of the biggest limited partners are spreading their bets, investing in many types of funds. Brandon Park, senior vice-president of Pacific Corporate Group Asset Management, which manages $15 billion for the California Public Employees' Retirement System and other large state pension funds, says over the last few years his firm has invested about $2 billion in 50 venture funds, including Technology Crossover Ventures, Oak Investment Partners, and 406 Ventures.

Sure, Park admits the doldrums in the IPO market have forced him to reduce his expectations for the VC industry. In the second quarter of 2008, there were no venture-backed IPOs in the U.S. stock market, the first time an entire quarter has passed without a venture IPO since 1978. But rather than trying to time the market, Park says, his clients are confident venture capital returns will remain strong over the long term. "It will continue to be a healthy portion of our clients' portfolio," says Park. In fact, he says, some clients are trying to increase their exposure to private equity. "We are extremely active in this space," says Park.

Ante is the computers department editor for BusinessWeek.