Wall Street may be hungry for fees, now that the once-lucrative business of structuring and reselling collateralized debt obligations (CDOs) stuffed to overflowing with subprime mortgage securities has gone up in smoke. But so far investment bankers are displaying little interest in returning to some of their bread-and-butter dealings, such as underwriting IPOs for startup companies. Wall Street’s apparent indifference to helping all but a tiny handful of venture-backed businesses raise capital in the public markets has irritated venture capital funds for several years, but now that irritation is becoming anxiety as Wall Street’s indifference is starting to eat away at the foundations of the $197 billion industry.

Just ask Jim Feuille. The general partner of Crosslink Capital in San Francisco has invested his fund’s money in only two new companies so far this year. While he’s negotiating terms of an investment in a third new portfolio company right now, that’s a far cry from the eight or nine new businesses in which Crosslink typically has invested. “We’re going to do less than half of what we usually do,” he says. “That means that, yes, there will be more entrepreneurs with good ideas and business plans that we simply can’t back.”

The problem is one of bandwidth. Venture capital funds are small teams of professionals, who help the entrepreneurs they finance take their businesses to the next level. That requires an investment of both time and attention. And when mature, profitable companies can’t find a banker willing to help take them public, they remain a drain on their venture backers.

This is an industry headache, and one that is growing in size and gravity. Only 155 companies received venture capital for the first time in their history during the third quarter of 2009, according to the MoneyTree Report, produced by PricewaterhouseCoopers and the NVCA and based on data from Thomson Reuters. That’s the lowest level on record since the industry began tracking this data in 1996. Only 13 percent of the $4.8 billion invested during the three-month period went to first-time deals, down from 19 percent of the capital invested during the second quarter of the year.

Meanwhile, despite the stock market rally this year, venture capital is actually flagging. In the first nine months of the year, only eight venture-backed companies went public, down from 86 in 2007, the year that the credit crunch began to roil financial markets. That data provides warning that the crisis that has been brewing in the venture capital industry is becoming dangerous to all of those engaged in the business of funding entrepreneurial businesses. Without an exit strategy, venture funds can’t capture the increase in value of the businesses they have already backed. That in turn means they can’t return those profits to their own investors, the pension funds, endowments, and other investors on whom the VC industry must rely to continue raising new capital. And if those investors—the limited partners in the venture funds—aren’t earning real cash returns, why would they bother to keep allocating capital to the industry? And without capital, how can VC funds keep identifying and financing promising entrepreneurial businesses?

Mark Heesen, the usually unflappable president of the NVCA, rattled by what the data suggested, believes that without an eightfold to tenfold increase in the number of venture-backed IPOs, the industry’s performance will deteriorate further. “That would be a toxic cycle to get into, one that would damage our ability to fund the next generation of clean-technology companies or biotechnology ideas,” one East Coast VC worries. “Are we really prepared to cut off funding to entrepreneurs? Do we really have all the fresh, bright ideas that we will ever need?”