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It is undeniable that the Venture Capital Industry is one of Silicon Valley’s economic lifeline with 39% of all VC investments in the US taking place in Silicon Valley.

The startup climate that is Silicon Valley is fueled in large part by the Silicon Valley VC industry.

As many would say, the VC industry is still in “drowning phase” wherein it is bombarded with a lot of obstacles.  It is simply hard up in bringing itself to the safe ground due to different circumstances.  The crisis began as early as 2007 and the industry is still trying to recuperate.  According to U.S. Venture Capital Index, VC followed another fall after having its first and second quarter failure.  

The typical exit path for VC companies in Silicon Valley have been through Mergers and Acquisitions (M&A) and the Initial Public Offerings (IPO). That has somewhat dried up the last 18 months, but we are slowly seeing exit being made, for example the first Silicon Valley IPO in 18 month was OpenTable (NASDAQ:OPEN) this summer which went quite well.

Still with all the chaos happening, investors still find ways to recover and get the business going again, but 2009 have been a year of struggle. According to data from IPOHome.com, we only have 21 companies who have done an IPO compared to 43 and 273 last year and in 2007 respectively.  

Another report from NVCA is that there were actually 1, 776 IPOs in the year 1990-2000 which eventually lowered down to unbelievable 392 from 2001-2008. This just shows that when there are only few IPOs, the market is also affected since the returns are also going down. Another reality is the fact that there were six VC-backed companies who made it public that they collectively raised less than $500 million compared to the $10.3 billion raised last year by 86 VC-backed IPOs.  This, some say is due to the Sarbes Oxley rules. 

The primary exit pipeline for VC funds have been M&A transactions, and the decrease of IPO’s also brought down valuations which resulted to M&A also going down.  

With both IPO and M&A drying up, the VC funds have slowed down their investments in new companies, to preserve their "dry powder" (cash) for existing investments that they see a need to support for a much longer period of time.  

Barry Kramer, Fenwick & West partner said however that despite of these problems with IPO’s and M&A, there is still a tinge of hope considering that “corporate America is going to be more willing to make acquisitions when their stock price is higher.”  With that in mind, people may again reconsider engaging in IPO’s.

Aside from IPO’s and M&A VC funds are starting to consider other exit routes.  One route they would usually use is including trade sale wherein a third party would actually purchase the share of the investor.  

Others would resort to looking for private trading platforms such as Xchanged and SharesPost. Also, to abate financial crisis, VC firms consider InsideVenture and Second Market which help venture firms find investors for mature startups. 

National Venture Capital Association president and CEO Mark Heesen did not deny that current situation of the industry. 

To have a more concrete example on how the Venture Capital Industry in Silicon Valley works today, we can look into one of the leading and most famous venture firms in the valley.  Draper Fisher Jurvetson has recently lowered it's fundraising from $600 million to $400 million.  DFJ is prominent globally and its offices are located in 33 cities. 

Could you imagine the dramatic change?  If this is what’s happening with one of the biggest firms, how much more to those smaller firms?  It was also reported that the lowest number of funds in 13 years has just happened wherein it reached as low as 25. Fundraising by VCs drastically went down from $4.6 billion during the previous quarter to $1.7 billion.  
With all these things going around, there are still VC firms who are actually surviving this crisis.  It’s not that they are not affected; it’s just that, they find better ways to recover, recuperate and finally stand again.  

Lately, Benchmark Capital proved that it’s not yet the end of the industry and that there is still hope.  Peter Fenton, the Benchmark partner was greatly praised and admired for being involved in funding FriendFeed and Spring Source.  FriendFeed is actually a startup which was reportedly bought by one of the most prominent social-networking which is the Facebook.  It was bought for $47.5 million.  
On the other hand, Spring Source was bought for &420 million by the computer “virtualization ” pioneer which is the VMware.  These two are really great investments for the part of Benchmark and also for other investors and founders of start ups.Benchmark is actually a venture capital firm which invests in startups usually with technology driven ones.

For funds, the firm would usually invest $3 million to $5million but once the relationship has been established it can invest until $15million.

Just also this year, Accel Partners was able to raise $1 billion for two funds.  Netscape founder Marc Andreessen of Andreessen Horowitz just successfully raised $300 million and this is currently the talk of the town.  Companies are all wishing that this VC firm will invest in them.

As NVCA President Mark Heesen would put it, there is still hope for Venture Capital Industry in Silicon Valley.  The recovery is yet to come but the game will never come to its end.  Investors as well as startup founders are doing the best they can to stand from dire straits and keep the business flourishing again.