Checking the horoscope of VC exits

HALF MOON BAY, Calif.--In an environment where venture-backed companies have fewer exits, technology VCs are surprisingly upbeat.

On Tuesday, here at the Fortune Brainstorm Tech conference, a group of venture capitalists sized up the market's outlook for the foreseeable future in an economic downturn. This week, two different research reports showed that second-quarter venture funding was either flat or down from the previous year, and the number of VC-backed exits--or the opportunities for IPO or acquisition--have shrunk in that time.

Dismissing talk about exits, Andrew Braccia, a partner at Accel Partners, said that the most important thing about investing in start-ups is placing value on company culture and a lasting business plan.

"We're in a cyclical business, but the trends are undeniably strong. IPO markets in the United States are going to be troublesome in the next couple of years, but if you (build value) you'll reap those rewards whenever they come," Braccia said.

In one example of his theory, his firm Accel is an investor in Facebook, one of the most talked about companies in Silicon Valley. He said that the social media company has a unique opportunity to build a business in the private markets right now. "It will have the luxury of being private for a little longer," he said.

Danny Rimer, a partner at Index Ventures, said he doesn't believe that the industry is operating without options for exit. Yes, the public markets have closed down. (There were no venture-backed IPOs in the second quarter this year.) But he said that his firm has sold four companies since the beginning of the year, an improvement on its success rate last year.

He said that the conventional thinking that a venture firm must have an exit within seven to eight years isn't always the case. One of Index's companies, Betfair, a betting exchange, has turned into one of the firm's best investments because it's worth many multiples of what the company put in it in 1998. "The duration argument is not a good one. We're going to wait as long as it takes to get the best exit for it," he said.

Dana Settle, a partner with Greycroft Partners, said her firm invests in smaller companies that need less than $1 million to get off the ground. For that reason, she hasn't seen the same exit issues that might befall a venture fund putting $20 million in a start-up. With that kind of investment, a venture firm would need a sale of more than $100 million to get a good return on their investment, she said. Settle said her firm has had two company acquisitions in the last six weeks.

"There's a great opportunity for smaller funds--there are tons of companies that don't need a ton of capital," Settle said. She's particularly excited about one of her investments, K2 Network, which is a massively multiplayer online game company.

That said, Index Venture relies on larger companies to buy its smaller VC-funded companies and if that market continues to dry up, then its business will be under pressure.

David Siminoff, a partner at Venrock, said that in historic times of great inflation and war, people "want to put cash under the mattress, but you can't because of inflation." So there's still demand for quality companies, he said, and those will eventually become public.

"It's hard to find quality companies. It's the marginal companies that came public (in the dot-com heyday) that got killed," said Siminoff, whose firm is invested in Tudou, a China-based version of YouTube. "I'm telling all my companies stay the course."

He added: "There's not that many great companies ready to be bought or consolidated."