Market watchers can't see beyond the tech bubble

A study by VentureOne and Ernst and Young reports that the number of companies operating with venture capital funding has continued to decrease. Overall, the study measured a 10 percent contraction in the number of companies that received at least one infusion of venture financing, a trend which they attribute to investor skittishness leftover from the tech boom.

But the study apparently failed to account for a parallel increase in the number of venture capitalists liquidating their investments, a trend observed by the National Venture Capital Association a few months ago. Granted, venture capitalists have become far more skeptical investors since the bursting of the tech bubble, and perform more rigorous analyses before investing in young firms. But, an increase in the number of exits would also bring down the number of companies that the VentureOne study would have picked up.

The companies that have received private financing in the past few years have been truly viable companies. Private equity investors and venture capitalists are selling off their holdings because they can currently get a high return and reinvest in other high growth assets. In fact, many private equity managers say that the lifecycle of their holdings has fallen from five or six years to two or three.

Bottom line: the VenureOne study makes it seem like the venture cap world is shrinking because no one is getting into it. Seen from a broader perspective, this simply isn’t true; people continue to enter, but they’re exiting faster because they can do so profitably. In the interim, it’s easy to portray a contraction, but the fact of the matter is that this is still a growing market, especially as institutional investors get into it, and Sarbanes-Oxley keeps companies from going public.