The past 24h illustrate perfectly the reality of what the venture world and entrepreneurs have to face when it comes to liquidity events. You are either shooting for a small exit or a big one, willingly or not. Most of the time willingly. 
Yahoo buys Xoopit for an estimated 20m USD and Amazon buys Zappos for a bit less than 1 billion dollars. Both companies raised from VCs. Big shots (Accel for Xoopit and Sequoia for Zappos), but the return is obviously not the same.
I think Xoopit had bigger plans and this is what seduced Accel but it eventually sold out fast for not so much, not even returning the investment made (assuming that Accel took 30% for the company by putting 5M they got back 6M out of the 20m USD unless they defined different liquidity preference in case of small exit). For a VC a Xoopit like deal is a big fail.
The problem is that VCs do not have the bandwith for deals like Xoopit. They want to invest in Zappos-like startups. It is just a question of bandwith: partners don't have the time to put ressources in companies that exit at those levels.
The problem is that the reality of the web ecosystem is made mostly of startups that in the best case will be Xoopits, companies that will exit in less than 50m USD. In Israel for example 90% of the internet startups that i see, including some backed by great VCs won't go further. How many Zappos have been built (on the web) in Israel so far? ICQ but mainly Shopping, Quigo and a few more. That's all.
There is absolutely nothing wrong with that. Actually i think you can be a great entrepreneur and highly happy if you build such a company. The problem is that the VC industry is not designed for those deals. And there will be lots of those in the coming years.
This is why a new generation of funds are trying to deal with them: Ycombinators, TechStars, Founder Fund, Profounder Capital, Brickhouse, Felicis Venture, Softech VC....
Those new small funds take the lead on smaller deals/exit.
My belief is that traditionnal VCs should not ignore those deals, obviously not by using the same tools.
For that they need to build the investment infrastructure differently. They need to get the approval from their LPs, then create a separate structure with 1 guy, 2 max that will manage up to 20m USD with close to zero back office and management fees (except salary) and a different carried interest. Partners of the VC would not invest time at all in those deals unless they start to gain unusual momentum and become candidate for later funding.
I think Israel needs more VCs that shoot that way. Europe right now is seeing one or 2 structure going into that direction (i am helping one getting on its feet in France right now).
The reality is that most entrepreneurs are happy building Xoopits like startups and this is a great news. In the next 12 months i anticipate a new wave of entrepreneurs and startups that will build such compnaies. They just need the adequate backup.
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