Fred Wilson wrote a blog last week on VC exits, bemoaning the lack of liquidity paths.  I admire Fred tremendously (both as an investor and blogger!) and think It's a great blog, but it only covers a part of the story.

First, a bit of background.  VCs need their start-ups to exit in order to pay back their limited partners.  The IPO window is effectively closed for VC-backed companies and even when it was somewhat open in 2006-2007, the bar was very high (typically you needed $100m in revenue, profitability and 7-9 years of operating history).  The practical path to liquidity for entrepreneurs, therefore, is to sell your company to a larger (typically public) company for cash and/or stock - an M&A exit.  Fred points out that, as a rule, Web start-ups simply do not thrive when snapped up by the (depressingly few) prospective acquirers like Google, Yahoo and AOL - leading to an unsustainalble cycle.

Why do I think Fred's blog only covers a part of the story?  Simply put, there are huge industries and parts of the economy where VC-backed start-ups are competing that are not covered in his analysis.  The life sciences industry, which has become a massive opportunity for entrepreneurs and VCs, has seen some terrific exits in both biotechnology (Flybridge Capital's senior advisor, Christoph Westphal's company, Sirtris had a strong IPO in 2007 and has a market cap north of $350m) and medical devices.  Our portfolio company, Brontes3D, was acquired by 3M for $95m after raising only $8m in capital.  Brontes, by the way, has indeed thrived under 3M's leadership.  Nearly two years later, the entire management team under CEO/co-founder Eric Paley is still there and 3M's resources and distribution channel has helped support taking the company's novel intraoral dental scanning device to market (as featured in yesterday's Boston Globe). 

The wireless industry has seen some nice exits for companies like Enpocket, 3rd Screen Media and m-Qube.  Empocket's management team under CEO/co-founder Mike Baker remains at acquirer Nokia and has taken on responsibility for all of Nokia's mobile marketing initiatives.  Finally, the enterprise software industry (selling to, gasp, IT) isn't (as my partner Chip Hazard likes to say) dead yet.  Some strong exits in that market in the last few years include Outlooksoft and Virsa (both bought by SAP), AppIQ (HP) and IM Logic (Symantec).  IMLogic's CEO/co-founder, Francis deSouza, remains at Symantec 2 years later as an SVP running a huge part of their business (nearly $1 billion in revenue, last I heard).

A cynical observer might point out a sharp contrast here.  The "easy come, easy go" Web 2.0 start-ups may not be building real, sustained value and so vaporize under an acquirer as quickly as they appear, with "quick flip" entrepreneurs running off to do their next big thing.  Meanwhile, the "built to last" entrepreneurs across a range of "long-term value creation" industries -- life sciences, medical devices, enterprise software to name a few -- are more likely to stick it through and help their acquirers see real value through continuous improvement.

But then again, I'm a former entrepreneur.  Optimism wins out over cynicism every time.