Flickr photo via Kaet44

Occasionally when I am interviewing venture capitalists, lawyers or entrepreneurs, the good-natured subjects of my queries turn the tables on me. The question usually is some variation of this: "What are you seeing out there?"

It happened just last week. And it got me thinking about a rather perplexing trend line I've noticed over the past four or five weeks. Venture capital money is flowing and flowing and flowing.

Since April 1 -- and this is no joke -- we've covered venture deals in the state totaling $137 million. (That doesn't even include some of the smaller angel deals we've covered.)

There have been a few big deals in recent weeks that have impacted the numbers -- including $30 million for Calisotga Pharmaceuticals and $20 million for Telecom Transport Management. But overall, I've counted 18 venture deals since the start of April, which means smaller rounds also are getting done.

What's amazing is that we are not even half way through the second quarter, and the venture dollars by my count have already surpassed the first quarter's total of $100 million invested. What's even more intriguing is that if the current pace continues, the second quarter numbers could nearly match the totals for the same period last year. And that's before the recession hit.

What gives?

Well, there's more going on than meets the eye. One important factor to consider here is something known in venture speak as the "inside round."

These are venture deals in which the existing investors pump capital into a startup company, foregoing the external validation that often comes from an outside investor who sets the terms. (In good times, companies and existing investors expects that the new cash will come in at a higher valuation.)

Inside rounds aren't necessarily a bad thing since they can show the venture capitalist's enthusiasm for the business. They also can be less traumatic for the entrepreneurs who don't have to spend a lot of time pounding on doors of new investors.

But in this climate, inside rounds are occurring for another reason too. Entrepreneurs and existing investors may not like what they see outside their comfy confines -- namely drastically reduced valuations and more stringent deal terms

If you look at some of the most recent venture deals in the state so far this quarter,  the vast majority of capital raised has been tied to inside rounds.

For example, DocuSign, Calistoga Pharmaceuticals, TTM, Likewise Software and Vigilos all raised capital from insiders.

There have been a few exceptions to this trend, notably Adapx's $9 million deal which was led by new investor UV Partners and Gist's $6.75 million deal led by Foundry Group. A few early-stage companies such as Opscode and 5to1.com also have attracted new cash.

But, for the most part, inside rounds are ruling the day. And that means the market is essentially frozen for those companies that want to tap external funding sources.

Joe Wallin, an attorney who works with startup companies at Davis Wright Tremaine, said there's a simple reason for this trend.

In this economic climate, venture capitalists are simply focusing on their own portfolio companies.

With valuations plummeting, Wallin said he's heard from some VCs who say they're not doing new deals unless the opportunity is really exciting.

"I think it is fair to say that during this downturn a lot of VCs are more focused on their own portfolios and generally less enthusiastic about hopping on planes," said Madrona's Greg Gottesman. "When the economy rebounds, as it inevitably will, the percentage of outside-led rounds should increase.  VCs still have a lot of money to put to work."

The numbers back up this thesis. According to Venture Capital Dispatch, inside rounds accounted for 57 percent of all deals in the first quarter. That compares to 41 percent in the third quarter of 2008 before the economic recession was in full force.

And in the boom year of 2000? Inside rounds accounted for less than a quarter of the venture deals.

[Flickr photo via Kaet44]