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VC Funding Down Amid Economic Worries

Investors are also wary due to skyrocketing valuations and an environment that some say has allowed any entrepreneur with a laptop and an idea to score funding.

"VCs are going at a slower pace because of a view the market got too hot and that people were just throwing money at ideas," said Jon Soberg, senior vice president at Blumberg Capital.

Adding to the heat and hype, of course, was the quarter's splashy rash of social media IPOs and S-1 filings, like the public debut of LinkedIn (LNKD - Get Report) and Pandora (P - Get Report) and filings of daily deals site Groupon and social gaming company Zynga.

In fact, while the second quarter was the strongest three month period for IPOs since 2000 with 22 VC-backed companies launching offerings, investors are wondering if the current economic woes may prevent companies from pursuing IPOs.

"We are still in the early stages of an upturn, but there will continue to be many downs as well as ups," said Bob Pavey, a partner with Morgenthaler Ventures. "And some of the downs will be painful."

Another result of the down cycle is that some smaller tech firms are having a difficult time raising capital today. "There's a lot of competition for certain deals, but there are only so many opportunities to invest," said Maha Ibrahim, a general partner at Canaan Partners. "There's a dearth of investment with mid-stage companies that maybe haven't shown enough progress to warrant a huge round."

Some tech watchers said they're surprised by a lack of confidence from the venture industry.

"It now takes as long to drive through Palo Alto, Calif., than it did during the bubble," said Steve Blank, who teaches entrepreneurship at the University of California, Berkeley and Stanford University, referring to the Silicon Valley tech hub. "You can't even hire a competent engineer [on the West Coast] and in New York -- this isn't a downturn."

--Written by Olivia Oran in New York.

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