Microsoft’s unsolicited $44.6 billion bid for Yahoo is an exciting, bold move for the Redmond, WA software giant who is desparately trying to compete with Google for the $800 billion in global advertising dollars, of which only $24 billion will be spent online in 2008 (a rate that is growing at over 20% per year).

But if VCs needed yet another signal that the exit environment is getting tougher, here is another one.
First, the IPO window is closed thanks to choppy stock markets and recession worries.  Then, some of the most popular technology company acquirers, like HP, IBM and Cisco, get battered in the stock market along with eveyrone else.  And now two of the most popular media and Internet acquirers, Microsoft and Yahoo, get frozen in their tracks as they try to figure out whether to combine.

What happens to VC-backed portfolios when the exit windows close?  We saw it occur in 2001-2003 and it’s not pretty.  The companies who had the investment thesis, "if you build it, they will come", find that no one is coming to their party.  And the companies that had the investment thesis, "get a few leading customers and then let’s sell to Yahoo/Microsoft/Google" are seeing two of the three candidates go into hunker down mode for the forseeable future.

Bottom line:  if you are raising capital and have the option, raise a bit more.  And if you have set your 2008 budget, reset it…a bit lower.