I ran across another opinion today (this time by Jeff Busgang) about the lack of viable exit strategies for venture-backed companies due to the current problems with our financial system.  He, however, goes into a bit more depth regarding his opinions on the future of venture funding over the next few years.

I reference his article only because he states very well what I also believe to be the current state of affairs within the VC industry.  The lackluster fundraising numbers for Q1 ($4.3 billion allocated among only forty funds! link) show that it is highly likely we will see a constriction in the number and capitalization of VC over the next few years due to the current financial environment—there is simply too much venture capital invested for current market conditions to provide viable exits to the investing firms.

As I discussed last Saturday, the buy-side IPO market is evaporating due to financial system instability and unrealistic expectations (or impatience) on the part of buy-side investors as shown over the past few years.  In order to really restore a favorable environment, the capital flow needs to improve and investment banks need to more consistently underwrite the smaller-cap IPOs… in order for that to start happening though, investors need to be retrained and become willing to be invested for the long-haul.  Without investor demand, I think it’s quite obvious that IPOs will be largely unsuccessful and unviable for venture-backed start-ups.  Therefore, without the ablility to seek funding from the public for their portfolio companies, firms will be forced to focus their efforts on cultivating acquisitions for even their more mature (and successful) companies.  While this can still be a viable exit, returns will undoubtedly be lower than a successful IPO, thereby returning less to the firms’ coffers and making less available for future investments.  The alternative of course being to hold their companies for longer and hoping for an improvement in the financial environment.  Either way, innovation will continue to be stifled by the lack of available capital.