“We believe our next fund will be smaller than our current one. If you’re going to have a smaller fund, it means you’re going to have a smaller team,” said general partner Jim Counihan.

Shortly after closing the local outpost, managing partner Gordie Nye, who opened the office by himself in 2005, left the firm.

The news, though, has not been all bad for the local venture community. Despite the difficult fundraising environment, GRP Partners closed a $200 million fund in March.

In April, DFJ Frontier, an offshoot of Draper Fisher Jurvetson, announced it was relocating its headquarters from Sacramento to a newly established office in Sherman Oaks. Co-founder David Cremin said that the move was precipitated by the rise in emerging media companies in Los Angeles. What’s more, DFJ announced the close of a $55 million fund.

Gauer said the exit markets, particularly mergers and acquisitions, are rapidly improving: "We've seen since about July or so a significant uptick in the buying patterns of the big acquirers."

He said he hopes the change will help the industry regain its footing in 2010.

Still, many firms had their fundraising efforts stymied in 2009. Counihan said he expects a sharp drop in the size of most funds, "falling back to pre-1995" levels.

In this difficult fundraising environment, a number of firms have simply stopped trying until the economy recovers.

“Many people have elected to just postpone those efforts,” said Momentum Venture’s Wilson.

Since funds often take months or years to raise, such postponements could have long-lasting effects. With some funds running out of capital and few new ones to replace them, there is a growing concern that local financing activity may remain depressed for an extended period.

Suster, of GRP Partners, said there will be an increase in what he called “zombie VCs” – firms that have companies they have not cashed out of, but little or no capital to make new investments.

“These are funds that really aren’t investing right now but keep going and are hopeful they can raise another fund in a year or two,” he said. “But a lot of them will disappear a couple years from now.”

Next

For reprint and licensing requests for this article, CLICK HERE.