Silicon Valley Venture Capitalist Confidence Index (Bloomberg ticker symbol: SVVCCI)

Transcription

1 Silicon Valley Venture Capitalist Confidence Index (Bloomberg ticker symbol: SVVCCI) Fourth Quarter 2011 (Release date: January 31, 2012) Mark V. Cannice, Ph.D. University of San Francisco The quarterly Silicon Valley Venture Capitalist Confidence Index (Bloomberg ticker symbol: SVVCCI) is based on an on-going survey of San Francisco Bay Area/Silicon Valley venture capitalists. The Index measures and reports the opinions of professional venture capitalists in their estimation of the highgrowth venture entrepreneurial environment in the San Francisco Bay Area over the next 6-18 months. 1 The Silicon Valley Venture Capitalist Confidence Index for the fourth quarter of 2011, based on a December 2011 survey of 30 San Francisco Bay Area venture capitalists, registered 3.27 on a 5 point scale (with 5 indicating high confidence and 1 indicating low confidence.) This quarter s index declined from the previous quarter s reading of 3.41 and marks a third consecutive quarter of an overall decline in confidence among the venture capitalist respondents to this on-going research. Please see Graph 1 for trend data. Trend line of Venture Capitalists' Confidence 1 Publishing a recurring confidence index of professional venture capital investors is intended to provide an on-going leading indicator of the overall health of the high-growth new venture environment. Questions about this study or related topics should be addressed to its author at Cannice@usfca.edu. The Silicon Valley Venture Capitalist Confidence Index is sponsored in part by:

2 Confidence in the future high-growth venture environment in the Bay Area declined for a third consecutive quarter to its lowest point since the financial crisis. As a group, the responding venture capitalists in the Q4 survey pointed to international economic and political uncertainty along with a constraining national regulatory and tax environment for a decline in confidence in the future venture environment. These macro issues along with declines in available funding for seed stage ventures diminished sentiment. The life science sector, in particular, was weighed down again by a difficult regulatory regime. The uneven exit environment and the lackluster performance of some firms that did exit recently also added to a generally cautious outlook. However, confidence in the long-term competitive advantage of the Silicon Valley ecosystem of new venture creation and innovation remained buoyant. In the following, I provide many of the comments of the participating venture capitalist respondents along with my analysis. Additionally, all of the Index respondents names and firms are listed in Table 1, save those who wished to remain anonymous. International macroeconomic and political uncertainty and their impact on the venture business model continued to weigh on VC confidence. David Pidwell of Alloy Ventures emphasized Uncertainty in the global macro-economy and the difficulties in extracting value (ROI) from venture capital investments presently. A venture respondent who provided comments in confidence stated Europe/US debt concerns are causing instability and very high market volatility. He continued, arguing that a Robust IPO market needs to be there for venture to succeed and this macro factor is dampening my outlook for the next 18 months. Another VC survey participant noted that Overall macro conditions are causing lots of conservative forecasts by portfolio companies. National regulatory and tax uncertainty also are hemming in confidence. Kurt Keilhacker of Techfund Capital explained While there is justified optimism in many new ventures there are a number of macro economic factors that are quite unsettling. Adding in the uncertainty regarding tax rates and a hostile White House to capital formation, entrepreneurs need to see more clarity to the nation's direction in 2012 before they breathe any relief." And a respondent who commented off the record observed Plenty of good company ideas out there but carried interest tax policy prospects and general economic uncertainty are dark clouds above our ecosystem. Limited partner capital for early stage ventures has become less available. Chester Wang of Acorn Campus Ventures indicated that Seed money stage funding is harder to get; this is not good for the total industry. And Bob Bozeman of Eastlake Ventures observed High volatility in the overall markets and poor liquidity by LPs for raising new funds. Meanwhile Bob Ackerman of Allegis Capital observed that The level of activity in Silicon Valley continues exceptionally strong. At the same time, there are some clouds on the horizon as fund raising for early stage venture funds continues to be challenging and the chronic shortage of engineers approaches critical. And a Venture respondent who wished to remain anonymous noted Decreasing LP support for VC based on historic returns. Still, Q4 saw an increase in total committed funds from the previous quarter albeit among fewer funds, suggesting consolidation in the venture industry. 2 Bill Reichert of Garage Technology Ventures reasoned On the plus side, the entrepreneurial energy pouring into Silicon Valley from around the world grows stronger every month. On the minus side, the lack of institutional LP support for early stage venture capital will leave hundreds of companies stranded when they need more capital later next year. The ray of hope on the capital side is that the billions in liquidity flowing into the pockets of the FLTZ (Facebook, LinkedIn, Twitter, Zynga) shareholders will recycle into the system and offset the withdrawal of LPs. 2 Thomson Reuters and NVCA Press Release, January 9,

3 The start-stop exit environment increases uncertainty and restrains confidence as well. Dan Lankford of Wavepoint Ventures noted Lot's of deals, but a slow exit environment. IPOs of venture backed firms increased in Q from the previous quarter but were down from the year ago quarter. 3 And Tom Rodgers of Advanced Technology Ventures suggested A little wind may have left the sails after some of the big name IPOs failed to live up to the overblown expectations. VC fundraising challenges are likely to start having a negative trickle down effect. The question is whether the healthy angel community can pick up the slack. In the long term this Darwinian contraction should lead to a healthier, more stable and more rational ecosystem. Additional constraints continue to weigh on the life science sector. Joe Mandato of De Novo Ventures shared The environment continues sluggish; regulatory hurdles remain high; the lack of clarity on the proper path also continues. There is continued limited partner apathy towards the space! And Gerard van Hamel Platerink of Accuitive Medical Ventures shared that Healthcare continues to be challenged by exogenous drivers (dampeners) of innovation FDA uncertainty and reimbursement risk. Access to capital is tough right now. Another venture respondent shared in confidence that While IT venture capital will remain strong and there will continue to be IT company formation, the healthcare/life sciences sector will continue to decline given the lack of availability of early-stage capital as limited partners pull back their healthcare investing given the challenges of FDA, reimbursement, and the lack of significant healthcare returns over the last decade. Still, overall liquidity opportunities do have some positive momentum with recent and expected major IPOs of venture backed firms, and that ray of light is spurring optimism among some of the responding venture capitalists. Igor Sill of Geneva Venture Management argued Whenever a series of successful IPOs are introduced there's validation for the venture capital model and asset return opportunity. Given the recent success of LinkedIn, Zynga, ServiceSource, Jive and GroupOn's IPO, the venture capital asset class is realizing one of its strongest cyclical returns in years. Public market valuations are robust, thus, offering Facebook, Twitter, Proofpoint and a pipeline of others optimism for a continued strong IPO market in So, I do believe we're heading for a pretty exciting time in venture capital returns. And Valuations are coming more in-line with investor expectations. Brian Panoff of Granite Ventures shared I m bullish on Bay Area start-ups and on the deployment of venture capital in the mid-to-long term. The broader economy seems to be ever-so-slowly improving, while there are also early signs of increased rationality in valuations of venture-backed companies in the more overheated technology sectors. And Sandy Miller of Institutional Venture Partners contended There are more rapidly growing venture-backed technology companies than ever before. They are achieving scale at a record pace. It s an exciting time though we need to be careful on valuations. New technologies and business models offer hope for the future. John Malloy of Blue Run Ventures emphasized that The shift to a Mobile Computing paradigm continues to be led from SV. In 2012 Mobile Enterprise will be a tremendous growth area. Jeb Miller of Jafco Ventures articulated that Silicon Valley remains a beacon of light in the darkening macro economy with talented entrepreneurs pursuing disruptive business models in the exploding cloud and mobile markets. With an abundance of capital for new ventures, the improving exit opportunities for quality start-ups and the atrophying of several incumbent vendors, I would imagine the Valley will continue to present a robust entrepreneurial environment over the next year. And Venky Ganesan of Globespan Capital Partners offered that Investing is about looking through the windshield not gazing at the rear view mirror. The trifecta of cloud, mobile, and social are fundamental paradigm shifts that provide a once in a generation wealth 3 Thomson Reuters and NVCA Press Release, January 3,

4 creation opportunity for the brave and the driven. Let others worry about the Euro, the housing crisis, the breakdown in Congress, etc., for the seeds of prosperity are sowed only in tumultuous times. In summary, confidence declined for the third consecutive quarter weighed down by macro economic uncertainty, uneven LP funding, a mixed exit environment, and regulatory pressures. As projected in earlier reports, it appears that the prolonged liquidity roadblocks and macro uncertainty have begun to impact fundraising, and this constraint is negatively impacting the availability of venture finance for early stage firms. It is unknowable which potential world-class firms will fail to launch due to these policy issues and macro constraints. (Thompson Reuters and the NVCA report that first time financings decreased significantly from Q3. 4 ) Fortunately, the Silicon Valley ecosystem creates value over long cycles despite temporary trends in politically induced macro-uncertainty and less than welcoming public financial markets. Whether the expected upcoming high profile IPO of Facebook will divert attention away from macro uncertainty and back to the business of value creation is key. In any case, new technology and business model developments employed by the cadres of determined entrepreneurs and new venture financiers will bring forth new world-class firms and their solutions to the market in due course. Table 1 Participating Venture Capitalists in the th Quarter Confidence Index Survey Participant Company Bill Byun 7 Capital Bill Reichert Garage Technology Ventures Bob Bozeman Eastlake Ventures Bob Pavey Morgenthaler Ventures Brian Panoff Granite Ventures Dan Lankford Wavepoint Ventures David Pidwell Alloy Ventures Deepak Kamra Canaan Partners Gerard van Hamel Platerink Accuitive Medical Ventures Igor Sill Geneva Venture Management Jeb Miller Jafco Ventures Joe Mandato De Novo Ventures John Malloy BlueRun Ventures Karan Mehandru Trinity Ventures Kurt Keilhacker Techfund Capital Robert Ackerman Allegis Capital Sandy Miller Institutional Venture Partners Shomit Ghose Onset Ventures Standish O Grady Granite Ventures Steve Harrick Institutional Venture Partners Tim Wilson Partech International T. Chester Wang Acorn Campus Ventures Tom Rodgers Advanced Technology Ventures Venky Ganesan Globespan Capital Partners IDG Ventures IDG Ventures 4 Thomson Reuters and NVCA Press Release, January 20,

5 Mark V. Cannice, Ph.D. is a Professor of Entrepreneurship and Innovation with the University of San Francisco School of Management. The author wishes to thank the participating venture capitalists who generously provided their expert commentary. Thanks also to the attorneys of Greenberg Traurig for their on-going support of this research, as well as to Jack Cannice for his copy-edit assistance. When citing the index, please refer to it as: The Silicon Valley Venture Capitalist Confidence Index, and include the associated Quarter/Year, as well as the name and title of the author. The Silicon Valley Venture Capitalist Confidence Index is a registered trademark of Mark V. Cannice. Copyright : Mark V. Cannice, Ph.D. All rights reserved. 5