Silicon valley venture capital confidence index

Venture capital confidence through 2009 and significant factors affecting investment and funding in the Silicon Valley.

In the middle of one of the hardest hitting recessions in the past 100 years, the presence of optimism and uptick in any confidence index is a welcome sign.    A new study by University of San Francisco Business School professor Mark Cannice says that Bay Area VCs are modestly more confident than they were the fourth quarter of last year, and way more confident than it was a year ago.  The study focuses on the Silicon Valley Venture Capital confidence Index and report VC opinions over the next 2-6 quarters.  As can be seen from the below chart, this is a critical piece of news because venture investment in 2009 nosedived:

Yr/Funding Funding Deals
2008 $27.99 billion 3,985
2009 $17.68 billion 2,795

According to the study, VC’s are satisfied that the macro-economic conditions have stabilized over the 4th quarter of 2009 and hence VC market normalcy’s can be expected.   The weaker economic conditions have filtered out the less-viable ventures and leaving behind survivors who can sell to markets with more demand due to fewer vendors.  Also new startups with better promise are emerging than in the previous 2 years.  Innovation has remained robust leading firms to evaluate early stage investments and revenue generating companies.  Economic growth gives direct sales revenue to venture backed customers especially in the enterprise segments.  Enterprise customers are now planning based on larger purses and an increase in consumer confidence.

Venture business models are now supported by more exit-opportunities.  An increased M&A activity and the impending IPO’s of  Face book,  LinkedIn and the acquisitions  of  Ad mob( by Google ), Play fish( by EA) show that high growth VC’s are back.  Green IT, health IT, cloud computing all show emerging opportunities and exit environments.  Exit markets have a large IPO calendar and this can lead to M&A and more VC liquidity.

“Notable return of exit opportunities—especially headline acquisitions—is breathing life into the venture business model,” Cannice says. The Venture Capital Journal shares the same sentiment for an M&A surge:

  • “The IPO and M&A markets will take off,” says Joey Lo of Venture Hype.
  • “M&A activity will be up significantly,” says Skip Simms of the Michigan Pre-seed Capital Fund.
  • “Mergers and acquisitions are back!” says Jeff Clavier of SoftTech VC.

On the flip side, VC financing is limited.  Much uncertainty and the bar for investments are higher with fewer exit options though there is no shortage of quality start-up investment opportunities. There is less money going towards fewer companies a la natural Darwinian contraction.  Stronger companies thrive with disruptive and resilient approaches funded.  Rational strategic growth continues to be focused as opposed to high risky growth. Cautious optimism also exists due to the nascent nature of the recovery and the lagging spending, housing and employment markets.  Congress may increase tax rates for VC carried interest – a credible threat to the optimism.  Venture valuations are only now returning to early 2008 levels and should be able to grow throughout 2010.  But risks include the withdrawal of the trillion dollar stimulus and the possible raising of Fed interest rates.  Limited supply of institutional finance and future economy concerns has constrained investment capital flow.  But the inventory of efficient and private ventures coupled with low interest rates will drive M&A and will confirm a stabilizing trend in the first half of 2010 and a vibrant entrepreneurial spurt in the latter half of 2010.

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