But unlike the Treasury Department’s interest in improving access to public markets–-which has led former National Venture Capital Association Chairwoman Kate Mitchell to form a task force to develop recommendations–-the SEC initiative could make staying private more compelling, which is not something the venture industry wants.

NVCA President Mark Heesen reacted coolly to the SEC’s plans, outlined in an April 6 letter from SEC Chairwoman Mary Schapiro to U.S. Rep. Darrell Issa (R, Calif.), chairman of the House Committee on Oversight and Government Reform. Schapiro said the SEC is reviewing the ban on general solicitation of private offerings and the number of shareholders, currently 500, that trigger public reporting, among other issues.

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Mark Heesen, president of the venture-capital trade group, and Emily Mendell, vice president of strategic affairs, weren’t shy about answering that question last week on the sidelines of the Dow Jones Private Equity Analyst Conference. While they appeared comfortable lounging in oversized chairs above the lobby of New York’s Waldorf-Astoria, they are anything but relaxed when thinking about what lies ahead.

Never before has the NVCA faced so many defining moments at once. Venture firms have now gone a full decade without collectively returning a dime, causing their investors like pension funds and university endowments to question whether the venture capital model even works. As a result, a staggering number of poor-performing venture firms are expected to go out of business in the next few years.

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“Ongoing economic uncertainty has kept many limited partners and venture capital firms on the fundraising sidelines in 2010 and this hesitation is likely to continue for the remainder of the year,” NVCA President Mark Heesen said in a statement.

Certainly looks that way. Consider the chart below (click to enlarge).

Quite the downward trend, yeah? What is it that Sequoia Capital partner Michael Moritz often says? “The best time to invest is when people are cowering under their desks.” Hmm. Something like that…

Their presence is sorely missed. Consider this: Ten-year returns slid to 8.4 percent in the third quarter from 40.2 percent a year ago.

That’s a significant fall–no, it’s a horrific fall. And it’s only going to get worse, as the dotcompost that’s been nourishing the Venture Capital Index leaches out once and for all and the effects of the IPO drought that the industry has been suffering through these past few years begin to be truly felt.

“It has taken a full decade after the technology bubble burst for the venture industry to fully realize the impact of that era and its aftermath,” NVCA president Mark Heesen said in a surprisingly candid statement. “The significant returns created by the robust exit markets of the late 1990s have carried the industry for a long period of time.”

No longer. “The new reality is much more somber for many venture firms,” Heesen continued. “There are still healthy returns to be made in venture capital, but until the venture community sees a more vibrant exit market we do not expect marked improvement overall.”

[Image Credit: Audiophile & Synergy Industries]

In 2009, venture capitalists invested $17.7 billion–37 percent less than in 2008 (see chart below; click to enlarge). And they funneled that money into just 2,795 start-ups–37 percent fewer than the year prior. The sectors where these declines hit hardest: Software, clean tech and biotech.

“The venture capital industry had no choice but to slow the investment pace in 2009,” NVCA president Mark Heesen said in a statement. “The weak exit environment resulting from an unstable public market combined with a challenged limited partner base sent a strong message to the venture community to pull back the reins–and the VC’s listened.”

While the market for VC investments in 2010 is likely to remain tight, the situation is improving. Said Heesen: “Now that the economy has begun to show signs of improvement, we expect to see dollars flow more freely back into those sectors that offered the most promise before the recession began–clean technology, life sciences and IT. The seed and early stage pipeline needs replenishing across all industries and the health of the startup community in the next decade will be dependent upon more robust first-time financings. 2010 should be the year to begin that process in earnest.”

Seems a paucity of IPOs and lackluster returns on investment have caused VC money to dry up. This does not bode well for an industry in what NVCA President Mark Heesen likes to refer to as a “Darwinian contraction”; “You are going to see a reduction in the number of firms, but more important you will see a reduction in the number of venture capital professionals,” Heesen told Reuters.

Until then, the market will have to make due with merger-and-acquisition deals, which themselves aren’t doing so well. There were just 68 M&As in the first quarter of 2009, the lowest number since 1999. And they generated just $3.2 billion–down 65 percent from a year ago. Seems acquiring companies are on the lookout for bargain-basement deals and there are unquestionably few to be had given the souring economy. “Acquiring companies are simply looking to be very aggressive buyers and frankly are looking for rock-bottom pricing because that’s what they should be doing in this kind of environment,” Jim Watson, managing general partner at CMEA Capital, told VentureWire. “If you’re a seller now it’s because you have to be a seller.”