An audience member asked a distinguished panel of venture capitalists that question at Adam Lashinsky’s fascinating iMeme panel this morning. Before I reveal the answer, it’ll probably be helpful to explain why the question deserved to be asked in the first place.

The tech-centric venture capital industry is under pressure from all fronts. On the investment side, good companies are harder to find. It’s not that there are fewer good startups; it’s that they don’t need money (thanks to cheaper underlying technology). If entrepreneurs raise any money at all, they command high valuations. At the same time, VCs are forced to invest earlier and more often. Rather than dropping, say, $15 million or $20 million on a handful of promising startups, they’ll put $1 million or $2 million into a few dozen. This not only puts VCs into competition with angel investors, it also means hiring more VCs to monitor all those investments, and a diluted draw for all partners.

On the other end, there are few exits. Wall Street is far more interested in hedge funds and buyouts than VC and tech IPOs. Which leaves two options: an acquisition by one of a handful of buyers, or profitability. Despite what VCs may say, they’re not built to handle profitable companies very well. VCs don’t want to dribble returns to limited partners. They want to sell their investments (or float them), get lump payouts, and start the cycle again. Google (GOOG), Microsoft (MSFT) and Yahoo (YHOO) have voracious appetites for startups, but many (YouTube and a few others excepting) don’t reach 8 figures, much less 9 or 10. This gives entrepreneurs even less incentive to take funding. Taking $5 million in a sale to eBay is a lot more profitable and less stressful than taking $5 million from a VC and rolling the dice on getting a much bigger payout someday.

In the words of panelist Jim Breyer of Accel Partners, “At the low end, we’re under pressure,” he said. “We’re trying to raise funds where the numbers work, with 30-40 companies per fund. We try to invest over 3-4 years and our goal is to make 10x on a $250 million sale. This has changed the nature of the people we hire. And every portfolio company is scrutinized for capital efficiency.”

If that weren’t enough, now the government is considering killing a nice tax break that VCs have long enjoyed. (See a nice piece here by Lashinsky.) In short, VCs earn 20% of the profits on the investments they perform on behalf of limited partners. Those gains are taxed at the 15% capital gains rate. If the change goes through, those profits will be considered a fee and charged as ordinary income.

All that is why the audience member asked the question, “Will the VC business still exist in 10 years?” of Breyer, Sequoia’s Mike Moritz, Jerry Murdock of Insight Venture Partners and Fred Wilson of Union Square Ventures (who, btw, is an outlier for his take on the tax break issue). So, what did the panel think? Moritz is notoriously pessimistic about the VC industry. He typically views such inquiries as an invitation to denigrate his peers and, presumably, drive business to Sequoia. “People would be far better off investing in an index fund,” than putting their money into a VC fund, he said. Asked how many funds beat the S&P 500, he estimated less than 20%.

Murdock was bullish. “There will always be a need for innovation,” he said. “That comes from small companies,” i.e., the domain of VC.

Ultimately, the answers were less than satisfying (although the rest of the panel was terrific). But that doesn’t mean it’s not a good - or important - question. The VC industry is under fire, and whether or not it fades away within a decade, it’s certainly facing a seismic shift. Given the VC industry’s role in the incubation, care, and feeding of so many of tech’s great successes, this could be the biggest story in business over the coming years.