Flickr photo via Shazari

Is there a shakeout coming in the venture capital business? Some industry watchers think so. At least that's the word from the Venture Capital Investing Conference in San Francisco where venture capitalists and pension fund managers predicted that the number of venture firms will continue to shrink in coming years.

"The numbers don't lie. In the first quarter of this year, the rate of return in total liquidations is one quarter what it was a year ago," Gary Morgenthaler of Morgenthaler Ventures said during a panel, according to a Reuters report. 

In fact, he said the number of venture firms are declining at about 10 percent per year to the current level of 760 firms.

In Seattle, several firms -- including Ignition Partners and Madrona Venture Group -- have raised capital in the past two years which makes them somewhat insulated from the current morass.

But there are problems on the horizon, including word earlier this year that the Washington State Investment Board (a backer of local firms such as OVP and Frazier Healthcare) was reducing its commitments to the venture capital asset class.

The problems facing the industry are really quite simple? With the IPO market essentially closed and valuations falling for M&A deals, VCs have not been able to generate returns for their investors.

In fact, at the OVP summit last month OVP's Gerry Langeler -- despite sharing his optimistic outlook for the industry -- said that only about 15 percent of venture firms had generated a profit since 2001.

That's a business model that many VCs would even consider broken. And it's causing some investors in VC funds to think twice before pulling the trigger.

"I would say, please produce some returns before we re-up with you," TIAA-CREF's Panda Hershey told attendees at the conference.

[Flickr photo via Shazari]