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Will VC jitters hamper tech breakthroughs?

The rocky financial market has venture capitalists shying away from "brave new world" investments--leaving some visionaries worried for the future.

Fear has struck "brave new world" investing.

The rocky financial market has venture capitalists shying away from brave new world investments and largely sticking to investments in companies that aim to produce faster and cheaper versions of current technology.

That has visionaries worried: Cut off funding for bold technology, and advances may happen in baby steps rather than leaps and bounds. And as VCs become more conservative with their cash, the development of innovative technology will increasingly fall to universities and to large corporations that operate skunk works projects.

"It's not that the technology won't get developed further, it's just that it will be in an academic environment, rather than a commercial one," said Scott Carter, a licensing associate at Caltech, in Pasadena, Calif.

Companies such as Intel and IBM also play a role, having already created large research and development departments, autonomous from the rest of the company, to work on breakthrough technologies. And those operations, despite the softening economy, will likely remain intact, since they are designed with a long-term goal in mind, said John Vanston, chairman of consulting research company Technology Futures, in Austin, Texas.

"VCs aren't the whole world, although they may think they are," Vanston said. "Brave new world investments will be explored by existing companies."

Companies have already shown that they will sustain their R&D budgets, keeping in mind that new technologies and products can fuel demand for an entire sector.

Vanston also noted the historic role of universities and the government in tech development.

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"The Internet was primarily developed by the government and universities. These breakthroughs were not by smaller companies," Vanston said.

At Caltech recently, Carter said, the university decided to help a company that got turned down for VC funding with government grants in order for it to continue work on developing molecular computing technology.

"This molecular computing technology was probably 10 years away from being a marketable product. When investors' bank accounts were flush, they were more willing to do these types of deals," Carter said.

Plus, the market may not be ready for early-stage technology any sooner if a company worked on it or if the university had it under its roof for a longer period.

"From a macro scale, I think things will still work out, even if venture funding drops. Technology will still make it out to the marketplace," Carter said. "But on a micro scale, some may lose out and there may be fewer companies. The individual that was developing the technology may have to look for a job if they can't get funding for their company and won't be able to devote all their time to that technology anymore."

And venture capitalists say that they will still fund some--fewer, but definitely some--innovative companies.

"There's no question that the number of these companies will decrease in the short to intermediate future, but we absolutely see some of these kinds of deals continuing to get funded," said Doug Carlisle, managing director of Menlo Ventures in Menlo Park, Calif.

Carlisle said his firm has taken these kinds of risks in down markets before, such as an investment in UUNet, the first commercial Internet ISP, in 1991 at the tail end of a four-year down cycle.

"Companies that have a difficult time articulating a business model will have a tougher time raising money. They have to articulate how to make money in two to three years, instead of 10," Carlisle said.