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Venture Capital's Touch of the Bubbly

After all, companies like Yahoo! (YHOO - Get Report) have been snapping up small start-ups like del.icio.us. The risk, Hornik says, is that the company becomes locked in to a narrow exit strategy. If a buyer doesn't emerge, the VCs end up throwing good money after bad to keep the company going. Wiser investors will put money only into companies that can be scaled into larger businesses.

Or, to put it another way: Companies built to be bought are putting the cart before the horse by focusing on an exit strategy first, and an innovative idea second. Build the company on the foundation of a good idea and, if it's innovative enough, the exit strategy will present itself when the time's right, whether an IPO, an acquisition or going it alone.

Hornik shared his caution on VentureBlog, a popular read among VCs, and half-jokingly titled his post "Bubble 2.0." That caused a small stir among his readers, some of whom demanded to know why, if this is another bubble, they haven't been able to cash out yet.

Hornik followed up the controversial post with a podcast to clear up the confusion. "I wasn't calling a bubble," he said. "I was calling warning signs -- like when you see clouds forming off the coast, and you think you may be seeing interesting times ahead when the hurricane comes."

The problem is, it's hard to point out warning signs without pointing out the bubble they warn us about. And whatever you do, don't mention the bubble. It's all forgotten now and let's hear no more about it.

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