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Venture Capital Isn't as Sick as VCs Want You to Think

At least a few venture capitalists seem to be crying in their cognac about the collapse of the IPO market for venture-backed firms. According to a study by the National Venture Capital Association, leaked first to the New York Times, not a single venture-backed company went public in the second quarter of this year. And just two went public in the first quarter.

In exchange for first dibs on the study, the Times lamented the study's sorry conclusion, quoting Paul Kedrosky, who it describes as an investor and blogger. (Hey, what do you know, me too!). Kedrosky tells the paper: "Here's an industry struggling in a big way to hang onto its investors, let alone find new ones. They've been hanging on by their fingernails." The lack of a good way to cash out just makes things worse. "There is no venture industry if there is no IPO market," Kedrosky says.

It's a sorry state of affairs, one that would be sorrier if it were true. But it's not. According to the NVCA's own data, the volume of venture capital investments has been progressing at a steady clip since hitting a low in 2003. Since that year, VC investments increased from $19.7 billion to $30.5 billion. Based on the Q1 numbers, investments by VCs looks like they are holding up even as the IPO exit door is closing. And, after all, the soundness of the VC industry is based on the money it can raise and invest.

But won't the number fall eventually if there is no prospect of an IPO? Actually, no. The IPO has always been just one way for VCs to cash out -- albeit the most spectacular way. Companies can also be sold privately or merged in stock-for-stock deals. Or, and this is a novel thought, they can stay private and generate profits internally. All of these options are still available, even on a grand level, as Blackstone Group's planned $3.2 billion sale of its plastic-containers business to Thomas Hicks' buyout firm attests.

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