VCs Get Used to Slower Exits, Maturing Companies

The ghost of the burst bubble continues to cast a long shadow over the technology industry.

Venture capitalists, for example, continue to be haunted by the mocking ghost of their past irrational exuberance. They invested in thousands upon thousands of companies before the market imploded, and now they’re still trying to keep those companies afloat and profitable, in never-ending hope that lucrative exits will materialize.

In 2000 alone, according to VenutreOne, VCs financed 2,638 companies, 966 of which remain privately held. Most failed, some were acquired, and fewer still have gone public. It is what it is.

The problem for venture capitalists is that many of the companies they funded so long ago still need financing and remain a long way from exits. Unless those private companies are profitable, VCs must continue financing them or face the unpalatable prospect of walking away from long-term investments. Understandably, most choose to stay the course.

That’s changing the demographic profiles of the companies in VCs’ portfolios. An article published today by Dow Jones Newswires provides the following portrait:

Charles River Ventures expects its portfolio companies to generate a total $1 billion in revenue this year, double last year’s amount. Advanced Technology Ventures says it has a significant number of companies with more than $10 million in annual revenue and several exceeding $25 million.

Overall, 86 percent of technology companies in VCs’ portfolios are generating some revenue and 25 percent are profitable, according to VentureOne. That 25 percent represents 1,094 U.S. companies in the information technology, and retail and consumer sectors, which include many Internet companies.

Interestingly, VCs appear to have inured themselves to this brave new world of long waits for exits and serialized rounds of investment that might extend throughout the alphabet.

The constituency that appears most disconcerted by this new state of affairs are the employees at private companies, many of whom joined with the expectation that exit-derived riches were just around the corner. It’s why many of them enlisted to work for startups, and it’s what kept them at those companies through the hard times. Now, though, they’re facing the sobering reality that the exits might not come.

The mythology of the startup company — you know, getting in on the ground floor of a promising startup enterprise affords the opportunity to share in tremendous wealth in exchange for maniacal commitment and a tireless work ethic — could be dying an agonizing death.

At minimum, prospective employees need to do their due diligence before making their investments, just as the VCs should have done before creating this problem in the first place.

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