Back in Black The VC industry is fattening up again--but what does this mean for your business?

Wondering what happened to that looming shakeout in the VCindustry you were hearing about a few years ago? The VC industryhas weathered the storm and is now entering a new funding cyclewith increasing momentum.

There are currently two prevailing schools of thought on thephantom shakeout. The first and more optimistic view holds thatfears were greatly exaggerated and the state of the VC industry wasnever as bad as was rumored. "I never believed the doomsdayscenarios for the VC industry," says Mark Heesen, president ofthe National Venture Capital Association. "We heard the numberof firms was going to be cut in half. Where we have seen a declineis in the number of VC professionals. Because the fund sizes aresmaller today, VC firms don't need as many partners. As aresult, many partners have gone out and started smaller, regionalfirms, so the number of firms has remained relativelyconstant."

The second point of view holds that the bad investments from the1999-2002 period have yet to work their way through the pipeline.These supposed realists suggest that in another few years, when VCfunds that were started in 1999 or 2000 go out looking for newfunds from their limited partners, they won't find many takersbecause their returns were so low. "When this happens,it's going to squeeze firms out of the industry," contendsRick Frisbie, founder of Wellesley, Massachusetts-based VC firmBattery Ventures. "Today there is too much money relative tothe number of good investment opportunities for VCs."