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venture-capitalBill Gurley, a venture capitalist at Benchmark Capital, has written one of the clearest explanations yet about what is happening to the venture capital industry.

Bottom line: Don’t be surprised if the number of VC firms in the U.S. is cut in half. And don’t be surprised if the average Silicon Valley resident doesn’t notice.

The reason: The VC industry may well return to the size it was during the mid-1990s, and this will be healthy for the industry overall.

Gurley concludes:

We have seen over and over again how excess capital can lead to crowded emerging markets with as many as 5-6 VC backed competitors. Reducing this to 2-3 players will result in less cutthroat behavior and much healthier returns for all companies and entrepreneurs in the market. Additionally, at a stabilized market size of well over $15B a year, there should be plenty of capital to fund the next Microsoft, Ebay, or Google.

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