There's a huge funnel effect. Most (99%?) of the YC companies don't IPO. A lot get bought out on the way, and many fizzle out. There's an enormous Power Law effect happening. (DropBox and AirBnB at one point accounted for 2/3 of the valuation)

Here is some more data from the source: http://blog.ycombinator.com/yc-portfolio-stats

> A lot get bought out on the way, and many fizzle out.

The concern is who does the buying? The number of public companies is small (and shrinking btw), how much more acquisitions can they absorb? If it is other private tech companies, the money is just changing hands between VC funds. In either case those sources of funding have to grow or change to provide more acquisition opportunities.

They can absorb a tremendous amount. The total market cap of the S&P is ~$18.5 trillion. [0] Total VC investment is ~$50 billion annually. [1] Let's say that each VC investment returned a 3X return (a reasonable average) then the S&P would only need to dilute itself by 1% per year to buy the entire stock of VC companies in that year.

Another way to look at it... In just one quarter [2] the S&P 500 spent more than $150 billion in stock buybacks, that's triple the annual amount of VC investment.

There is a tremendous amount of room for the market to absorb innovative real companies.

[0] https://en.wikipedia.org/wiki/S%26P_500_Index [1] http://nvca.org/pressreleases/annual-venture-capital-investm... [2] http://www.factset.com/websitefiles/PDFs/buyback/buyback_12....

How many companies a year are bought by public companies? (A quick google search didn't reveal the answer.)

That's another funding exit.