After being here for awhile I am starting to get a grip on what is going on in the Venture Capital world here in the Silicon Valley. The Venture Capital funds are going through a tough period at the moment. There are still a number of investments being made (and compared to Europe there still a higher volume of VC funding being done).

So what have happened? The US VC industry raised over 100 B USD for their funds in the past 3 years, but investment volume has declined dramatically (1/6 annualised in 2009 compared to 2008), so many of the Silicon Valley VC’s have a great deal of cash to invest (but there are exceptions to this of course).

What has changed is the willingnes to take risk, most VC’s are currently acting out of the uncertainty of future, will the US VC industry be able to keep raising an average in of 30B – 35B USD per year for their funds?

And…

How long will they have to support their current investment portfolio companies?

And this last question is the real pressing one for most investors here in Silicon Valley.

What happened is that the VC firm’s exit pipeline has dried out, due to a number of factors, IPO’s are tuffer, caused not only by the credit crunch but also due to the Sarbanes-Oxley act creating overhead (which means IPO’s at later stages), the M&A pipline is pretty dry as well. Even though some of the big corporations actually do have large cash positions to acquire companies (or liquid shares to pay with), they are pressing the valuations down due to the tuffer IPO climate.

A real interesting opportunity at the moment here in the Valley is alternative exit path’s, however you can create them. And what we are talking about is a way for the VC’s to sell their positions in their portfolio companies, not necessarily over the stock market, but to other parties that are not typical M&Q deals, but rather new investors buying them out.

So here is a great business opportunity for alternative and new solutions for this, one is Tim Drapers Xchange (that I wrote about a few weeks ago), if I was in the investment banking industry or connected with the big long-term investment funds, I would start a new company to target this. I would not build an alternative trading marketing such as XChange, but instead look at how I can connect the VC’s to longer to these term investors.

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