VentureOne reports that the VC overhang left over from the bubble era funds (1999 and 2000) and not yet invested or given back is is $54B. More than half, $33B, is earmarked for new ventures; the balance is reserved to support existing investments. New capital inflows into venture are much smaller: $8B in 2003 and $16B in 2004. New funds are also generally smaller than the bubble era gigabuck funds, and yet the amount required before an IPO or exit has been climbing since 2000. Most of the funds have gone Back to the Future, meaning back to doing early-stage investments, with both their new funds and their overhang funds. The result is a gap in mid-stage funding between early-stage who haven't yet hit their stride but have sucked much of the early-stage capacity to invest, and late-stage who are on the ramp towards IPO and find many bidders to get in.
Historically those ventures that require substantial capital to grow their franchises have fallen between the cracks unless some innovative funding mechanism hits the Street. Before they got into the takeover game, Drexel Burnham used junk bonds to fund cable and telecom companies (notably TCI, now part of Comcast, and MCI, soon to be part of Verizon; maybe the CI means capital intensive). Covad and other bubble-era telecom companies also were funded by high-yield debt; and many of the dot-coms were funded with rapid IPO's and secondaries. Today the funding vehicle for these capital-intensive high-fliers is uncertain. The world may be awash in liquidity but a class of ventures falls between the back-to-the-future venture funds and the risk-averse late-stage funds.
Watch closely if the emerging "CI" ventures such as Vonage can snag major private funding to continue their growth. Like TCI and MCI before them, Vonage is suffering massive losses to pay for subscriber growth. Unlike them, when the dust settles they will not have built out a physical plant, but a consumer brand in a rapidly commoditizing market with substantial competitors (Comcast, SBC). Is that enough to gain the confidence of investors?