Tracy Lefteroff’s Cautious Outlook For Venture Investing And Fundraising

It is hard not to be gloomy with the broad challenges facing investing and venture investing in particular.

The European sovereign debt crisis is like a flu that won’t go away. Domestic economic growth may be picking up, but it remains uninspiring, especially with another European recession on the horizon.

Finally, unemployment is intractably high, and the presidential elections are standing in the way of another stimulus package.

Against these hurdles, it may seem counter intuitive that venture investors placed $21.2 billion with startups so far this year, 20% more than last year. The MoneyTree Report with this tally also shows deal volume through September up a less striking, but still healthy, 3%.

One question as 2011 comes to a close is can this pace continue in the 2012. A cautious Tracy Lefteroff, global managing partner of the venture capital practice at PricewaterhouseCoopers, thinks not.

In an interview on Monday, Lefteroff said he doesn’t see a dramatic change one way or the other in fourth-quarter investing. However, next year could be sideways or down, says this long time industry observer.

Many firms have more companies in their portfolios than they can carry and will have to make tough decisions on which ones to support. “You can only carry these companies so long before you have to make a decision,” Lefteroff says. “Next year could be a pivotal year for some funds.”

If they don’t see liquidity, they are going to have to cut costs.

Lefteroff also thinks public market investors will wait to see what the elections bring and where the economy goes before warming up to new issues. “I actually think the IPO market will be relatively flat next year,” he says.

This includes cleantech. But life sciences might find itself on better footing. And social networking could be a hot spot. (Though Zynga’s early life as a public company isn’t doing anything to raise confidence.)

Venture fund raising could follow investing lower, potentially as much as 15% to 20%, he adds. And the number of active investors could decline as current funds dry up and partnerships fail to raise new money.

Lefteroff said it is less clear when VCs will really start making money from Chinese and Indian funds. “I think it is going to be a while,” he suggested.

Firms may have portfolios that look good on paper and some have nurtured portfolio companies to good outcomes. But in terms of providing handsome returns on finished funds, he hasn’t yet seen huge successes.

Challenges include repatriating money from China and over coming infrastructure deficiencies in India.

(The MoneyTree Report is on this page.)