Venture capitalists in the United States are bracing for the worst over the next 18 months.

The National Venture Capital Association solicited input from its members on their views of the immediate and long-term horizons following the attacks on September 11. It found that the venture capital industry is preparing itself for an extremely difficult economic environment over the next 12-18 months but remains confident that private equity investment will prevail.

Concerns center around the economic environment’s direct effect on investor confidence. Venture capitalists expect to see a continued slower pace of new investments in the short-term, as investors wait to understand the impact that the attacks and their aftermath will have on the economy.

There is also an increased concern around the limited exit options for existing portfolio companies, as the re-opening of the IPO market and resurgence of the acquisitions market may be further pushed out into the future. Under such a scenario, venture capitalists will be faced with the prospect of supporting their portfolio companies longer than planned.

On the positive side, an “overhang” of venture capital funds still exists, estimated at approximately $45 billion at the end of the second quarter of 2001. A large percentage of these funds will likely serve as reserves for existing portfolio companies. To address the challenges that lie ahead, venture capitalists are employing strategies that include maintaining reserves to support current companies, engaging in additional rounds of triage, and “belt tightening” at their companies and within their own firms.

Despite the short-term concerns, there is consensus in the industry that venture capital will continue to play a strong and critical role in the nation’s economic growth. The nature of venture capital investment is long term and the industry will continue to return to its fundamental roots and move away from the unsustainable investment pace of 2000.

“The venture capital industry is fundamentally linked to U.S. innovation and growth. Thus, there are elements of our industry that we all should be watching very closely including ongoing investment levels and ‘overhang’ on funds raised but not yet invested. By understanding where these figures are trending, we can gauge a fairly accurate assessment of where we will be five years from now,” said Mark Heesen, president of NVCA.

“We have tremendous flexibility as an industry to move where the opportunities lie. That flexibility will serve us and our investors well. The venture capital industry is strong at its core and there is confidence that we will continue to support growth and innovation in the U.S. at a time when it is fundamentally critical.”