Another report by the National Venture Capital Association found that only five venture-backed startups achieved an IPO in Q1 2008. We’ve never seen levels this low since the bottom of the bear market in Q2 2003. A public market with a healthy appetite for new issues is essential for the venture capital industry. It drives the lucrative exits that VCs are looking for and also, in a roundabout way, cycles money back into venture fund coffers for the next generation of startups. In a market wary of IPOs, the only remaining exit opportunity is acquisition by strategic buyers.

We know that VCs are frustratingly lemming-like in behavior. As with all investment activities and fields, it is much safer to follow the crowd or herd than to venture out, pardon the pun. But as with all investment activities and fields, it is much more profitable to invest with a contrarian framework.

Bull market vintage funds usually pay top dollar in terms of valuations. It is notoriously difficult to time the markets, but a good or lucky venture fund could exit handsomely on a few investments while valuations are still rising. However, most investments will have been made at the most expensive valuations. This is not usually a recipe for success.

Bear market vintage funds usually buy equity in startups at favorable valuations. It is still notoriously difficult to time the markets, but the depressed valuations paid by venture funds make it more likely their exits will be profitable. Investments made now while we are in a bear market will take several years to harvest. When portfolio companies are ripe, if history is any guide, the markets will have turned for the better and exit opportunities will abound.

What would I do if I wore the shiny shoes of a VC? As I said before, I would resolutely shun the second-tier ideas that are social networking apps built by self-styled “social networking gurus” or “social app gurus” because these toy ventures will never achieve noticeable success. If I had to play in the Web 2.0 playground, I would concentrate on “primary platforms” that will compete directly against existing social networks like Myspace (NWS-A) and Facebook in a unique way. I’m sure there are entrepreneurs frantically trying to figure out different ways to address the social networking space. I would not fund any social networking apps that would need to exist within Myspace, Facebook, OpenSocial (GOOG), or other platform ecosystems. In the big picture, the cost to build a primary platform versus a secondary web application, or even networks of secondary web applications, differs little. The reduced cost of building consumer Web 2.0 businesses means perhaps we should be allocating less capital to this space anyway.

Of course, not everything is Web 2.0 – let’s not be myopic here. Enterprise 2.0 looks promising as it actually has a potential revenue model around it. I’m crossing my fingers that the clean tech guys will launch something truly revolutionary and world-changing. The already significant attention given to that space by VCs will pale in comparison to the resultant capital flooding to clean tech if some genius scores a big hit.

What would I do if I wore the worn-out sneakers of an entrepreneur? I would try and do what Marc Andreessen did with Ning and raise more money than I need to weather the coming slowdown. Giving up a bit more equity in this environment makes sense in order to ensure that my startup makes it through alive. This is exactly what I’m trying to do with my new stealth mode startup. Now I’m no Andreessen and my deal is so new, but I’ll just have to keep pitching to see how far we get.