When asked if the VC industry has hit bottom yet, Fitzgerald replies, “I would say no.”

The venture industry is going to “shrink dramatically” over the next three to five years, contends Fitzgerald, of Commonwealth Capital Ventures in Massachusetts. “There’s going to be a lot less capital out there,” he says.

Through the first two quarters of this year, U.S. venture capitalists have invested $6.9 billion, bringing the industry down to levels seen in 1996 and 1997, according to from PricewaterhouseCoopers LLP (PwC) and the National Venture Capital Association (NVCA). MoneyTree Report authors predicted a “gradual increase in investment” through the rest of the year, so Fitzgerald's view isn’t shared by all venture capitalists.

But VCs are hesitant to invest in new companies as returns have decreased significantly in the past decade, Fitzgerald says. Single-digit returns on investment are common these days, whereas before the dot-com crash venture firms routinely racked up double-digit profits and a few funds produced triple-digit returns, he says.

The dot-com crash and current recession have done their share in slashing available venture funds, but Fitzgerald, who has more than 20 years experience investing in early stage companies, argues that there is still too much venture cash available. Shrinking the pool of available funds will ensure that only the most worthy companies receive funding, and prevent niche markets from being flooded with too many vendors, he said.