By Dan Primack
August 9, 2011

How the public market meltdown could affect venture capital.

Legendary venture capitalist Alan Patricof is distressed by the political conditions that have created our economic morass, but doesn’t believe it will have much of an impact on his early-stage investment business.What follows are excerpts of a conversation he and I had last night:

What was your day like? “It was a typical Monday. We had three companies come in and did our regular portfolio review. I’ve been through so many of these situations that I’ve learned you just ride through it.

I wasn’t going to watch the market open and check my Blackberry every hour. Most companies in my world are at such an early stage of growth that this doesn’t affect them, and with my personal portfolio the worst mistake you can make at this time is to make decisions irrationally. So had I been paying a lot of attention, I still wouldn’t have done a thing.”

Macro impact on VC market: “The concern, if anything, is that the people who are now buying positions in companies they think are in the pre-IPO last round have some very exorbitant ideas about where valuations deserve to be. I can’t blame them, since they’ve looked around at LinkedIn and others that have gone public, but my experience is that this part of the market will quiet down…

A lot of people have adapted their practices to have big funds that put lots of money to work in order to ride that pre-IPO wave, and investment bankers are chasing everybody and putting sugar-plums in their heads. That carousel may be about to stop turning.”

On the possible decline of angel investors: “Fewer angels would be a very positive trend as far as I’m concerned, because that’s where a lot of the irrationality has come in. A lot of earlier-stage deals that would have been priced at $2 million six or twelve months ago have risen to $7 million pre-money because of angels, particularly here in New York.”

Worried about the IPO window closing? “I think I’d take issue with your characterization of the IPO window having been broadly open. The market has been pretty limited, to Chinese issuers, oil drillers, metal companies and tech companies in the consumer business. Most importantly, almost all of those companies have valuations in excess of $250 million, whereas 90% of business in digital media, where I focus, have sold for under $100 million. That’s why IPOs are never part of our exit strategy when making an investment.”

Thoughts on the political situation: “I was very disappointed by the decision that came out of Congress last week. I thought it was almost the worst of all worlds. The problem is clearly bigger than $2.5 trillion or even $4.5 trillion. Until Congress and everyone else finds a way to deal with our fundamental problems, then things could continue to get worse…

It’s a shame. If you look at all the people who make a lot of money and who were willing to accept higher taxes because they felt it was justified, even the farmers, it’s amazing to think something couldn’t get done just because a bunch of Congressmen signed a silly pledge to Grover Norquist…

I don’t know if S&P did the right thing, but if nothing else it was a courageous position to take.”

Will the “Super Congress” be effective? “I think they’ll get done what they need to, because I don’t think they have a choice. To do something more substantial, however, I think they’ll have to wait until the next go around.”

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