The limited partners who give VCs money include managed pension funds, college endowments, and others that very much relate to middle america. It's not all the VC's money that is being burned. They get a 2% annual rake and they can usually ponzi scheme their way to profitability through existing relationships or getting out profitably at the initial IPO price of a company (very rare these days)

It's a leading indicator. Gas prices are unsustainably low, tech startups are in trouble, China is in the midst of an economic crisis, and US stocks have been very volatile for most of this year. These are all signs we might be due for a correction.

Aside: Don't invest too heavily in the same field you work in, because you don't want to lose your job and lose your investments at the same time.

I believe you should invest in the fields that you work in and understand (as long as you are investing long-term).

Your time and expertise in these areas will give you better insight that most other investors will not have. See Warren Buffett's "circle of competence".

The job of Buffet is to buy entire companies. Not so many people has the same job, so his point of view is interesting but should not be common.

And then: Enron.

Exactly. Not only were many employees invested in the same sector, their nest-eggs were invested in their employer, which is (from a safety perspective) even worse.

'Course, that invites some comparisons to equity in startups...

The biggest one is that people all across America are invested in tech companies. Pension funds are big investors in PE and VC funds, as well as investors in publicly listed equities. A tech bust would put further strain on already strained public pension systems across the US, and could even result in something like a federal government bailout if those systems cannot bear the additional burden (i.e. taxpayers everywhere foot the bill).

I would be very surprised if there were any pension funds out there with such heavy VC allocations to the point where a downturn would encourage a federal bailout. Do you know of any?

It's just one more straw. I don't think there's a single class of investment in any pension fund that would alone make a bailout necessary. But I wouldn't be at all surprised to hear that a tech sector bust would cost several funds upwards of 10%. Add a few more failures of that kind to the mix, and we'd be talking bailout.

How are you coming up with 10%? Do you know what the typical allocation to VC for a pension fund is?

VC and PE? 5%. But add to that exposure to the publicly listed tech sector, for aggressive funds, that could be as high as 20%. Then there are secondary effects like a downturn in Bay area real estate.

PE is going to have completely different dynamics as far as industry allocations. I would love to see an example of a pension fund with a 20% allocation to tech. And if you're talking about a federal bailout, this is likely going to be a public pension fund which makes it even more unlikely.

The tech bubble burst in 1999-2000 affected even small sized software companies in Europe.

In Portugal it caused the first signs of the current crisis, and caused quite a few of us in IT to move abroad.

Middle America has nothing to do with Silicon Valley in the same way they have nothing to do with collateralized debt obligations and credit default swaps. Most people aren't directly invested in anything complicated - except perhaps at arms-length if their pension fund manager has brought into it.

Despite not being invested in complex derivatives, middle america sure noticed the banking crisis.

This is because it was largely the portfolios supporting middle America that got tarnished by the banking crisis. With the exception of a few notable coastal markets, middle America had the most to lose, which is rather sad, because they were already ravaged enough as it is by the steel mills and manufacturing jobs leaving its many once-prosperous towns and cities.