Venture capital is getting scarce.

According to new data from PricewaterhouseCoopers and the National Venture Association, last year, venture capital investments fell to their lowest level since 1997. Total investment fell 37%, while deal volume fell 30%.

Some cheered the news, notably venture capitalist Fred Wilson and investor and markets commentator Paul Kedrosky. Wilson argues that $15 billion is about all the venture industry can capably invest. Kedroksy, meanwhile, points to the numbers.

"We have an industry that, as of end of year 2009, sunk to a negative 10-year [internal rate of return], with the bubble exits finally falling off the sheet," he wrote in a blog post on Friday.

I've had similar concerns for a while, but give Kedrosky credit for banging the drum. He believes the dot-com bubble years were as bad for the VC industry as they were for the stock market and common investors.

He said as much when I interviewed him at a tech conference here in Denver in November. At the time, Kedrosky said that the average "money-in" for a VC investor at the height of the 1999 bubble was $16 million, which created an implied valuation of roughly $200 million before an IPO. "You'd have to go public at $1 billion to create a meaningful exit," Kedrosky told me.

To understand how crazy that is, consider that insurer Assurant (NYSE:AIZ) ranks as the 25th-largest U.S. IPO ever at a debut market value of $1.76 billion.

What's more, over the past year, only three issues went public with a price tag of greater than $1 billion, according to data from Renaissance Capital. They were:

  • Brazil's Banco Santander (NYSE:BSBR) at $4.02 billion.
  • Verisk Analytics (NASDAQ:VRSK) at $1.88 billion.
  • Shanda Games (NASDAQ:GAME) at $1.04 billion.

If VC investments are declining, there's likely to be less pressure on private equity valuations, which in turn should lead to fewer overheated public offerings. We're seeing evidence of this now. (NASDAQ:CYOU), SolarWinds (NYSE:SWI), and Vitamin Shoppe (NYSE:VSI) have all earned strong returns not just for bankers but also aftermarket investors since their 2009 debuts.

Yet risk remains. Twitter earned a $1 billion valuation before it had earned a profit of any kind, and Facebook is reportedly valued at more than $11 billion. I'm a believer in both companies, though I think Twitter is priced more reasonably.

Still, both of these hype-tastic businesses could disappoint in an IPO. Reality distortion fields may not dissipate easily, but they always do eventually.

"The idea that we can return to what was [during the bubble years] is crazy. The capital markets have changed," Kedroksy said. Let's hope he's right.

Now it's your turn to weigh in. Do we need more or less VC investment? Are you bullish or bearish on the 2010 IPO market? Make your voice heard using the comments box below.

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Fool contributor Tim Beyers is a member of the Motley Fool Rule Breakers stock-picking team. He didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. The Fool's disclosure policy got an electric flyswatter for Christmas.