Silicon Valley Venture Capitalist Confidence Index®
A depressed exit market for venture-backed firms in the first quarter of 20132 was not enough to reverse the positive trend in confidence of Silicon Valley venture capitalists. The Index of Silicon Valley Venture Capitalists’ confidence in the future high-growth entrepreneurial environment in the San Francisco Bay Area rose again in the first quarter of 2013. The increase in Q1 confidence made for three consecutive quarters of increasing sentiment among the responding venture capitalists to this quarterly survey and research report. In Q1 venture capitalists credited a stabilizing macro-environment that exhibited less political and economic uncertainty than recent quarters. The passage of time from recent poor experiences with the performance of some social media businesses was also noted as a positive factor. In this less uncertain environment, favorable technology trends were in greater focus and had a larger impact on confidence.
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While concern over the moribund exit market, fundraising challenges, and structural shifts in the venture industry persisted, sentiment tends to be a function of future expectations rather than current circumstances, particularly in the forward-looking venture capital industry. And in the first quarter of 2013 a strong belief in the eventual outcomes of extensive entrepreneurial talent focused on emerging opportunities hosted in a welcoming Silicon Valley ecosystem remained evident. 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 provided their comments confidentially.
An expectation that industry level pressures on the venture capital business model will moderate somewhat is allowing positive sentiment to persist. More optimistic on the future than on the recent past, Bill Reichert of Garage Technology Ventures shared “We've waited through the chilling effect of the troubled IPOs of Zynga and Groupon. There is less frothiness in social/local/mobile/gaming. Calmer heads seem to be prevailing, and the overall market is up." And Mark Platshon of Birchmere Ventures struck an optimistic chord, saying "The Valley will always reinvent itself or change to build new approaches." And John Malloy of BlueRun Ventures added that he “still remains optimistic for the medium to long term outlook for the Valley as the single best market for entrepreneurship.”
More specifically, exit opportunities are expected to improve. Kurt Keilhacker of TechFund indicated "The rising M&A activity increases the confidence in exits for venture funds and raises overall investment optimism.” Similarly, Alain Harrus pointed out “continued momentum driven by large exits in software.”
Technology trends and portfolio firm performance are also supporting the venture business model. For instance, Sandy Miller of Institutional Venture Partners explained that “There are a number of 2 Thomson Reuters and the National Venture Capital Association reported a year on year decrease in the number of venture-backed IPOs of 58% and a 73% drop in the number of venture-backed M&As in Q1 2013 (press release dated April 1, 2013). 3 favorable tailwinds for technology venture capital including the resurgence of the enterprise sector and the revival of interest in technology IPOs. I think it will be a strong year for exits, both IPOs and M&A transactions of scale.” And Deepak Kamra of Canaan Partners reported “expanding consumer and enterprise spending, coupled with major technology shifts to mobile and cloud computing.” Likewise, Bill Byun of 7 Capital affirmed “Portfolio companies are showing significant growth in revenue as well as outlook for the next 6+ months.” And Bob Bozeman of Eastlake Ventures described the entrepreneurial environment as “‘less smoke and more fire’ - meaning that opportunities seemed better grounded and less trivial - attracting better quality investment.”
The availability of seed financing coupled with positive technology trends is also supporting the venture ecosystem. Jeb Miller of Jafco Venture concluded “Its an awesome time to launch a startup in the Bay Area with massive market opportunities riding the platform shifts to cloud and mobile, tremendous talent availability as legacy companies atrophy, and an abundance of early stage capital available to fund new projects. Exit markets continue to improve and with it the energy and enthusiasm of the startup economy.” A venture capitalist respondent who provided comments confidentially agreed, noting a “large number of startups with a number of angel investors and seed funds...” Furthermore, Dan Lankford of Wavepoint Ventures indicated he is “seeing a lot of seed stage deals, many of which have been self funded up to this point.” Lankford continued, saying there “seems to be a second wave of smaller, more capital efficient clean tech deals.”
Finding opportunity within the venture industry restructuring, Elton Sherwin of Ridgewood Capital stated “There appears to be over 400 venture capital firms that are either inactive (stopped investing) or have quietly gone out of business. Despite this there are new companies springing up everywhere. This seems to be driven by three trends: increased angel activity, increased corporate venture investing, and continuing lowering of the cost to start a software or SAS business. The movie, “The Social Network” may also have helped.”
However, not all venture capitalists who responded to the Q1 survey agreed with the view of a more munificent environment. For example, Igor Sill of Geneva Venture Management argued that “Despite signs of an improving economy and new found stock market optimism, I sense considerable concern over the impact of governmental policy on the venture capital industry. While public market valuations have more than doubled since 2009, the economic and political uncertainty of private equity continues to hinder venture capital rounds and values. Having said that, cloud based, web centric software innovations with global market access remain the single largest venture growth segment with a 10% increase over 2011 levels to $8.3 billion. This represents the highest level of venture investments since 2001 levels, per the PWC/NVCA MoneyTree™ Report. So, I would have to say that I am cautiously keen on all things software and less so on clean tech, bio sciences, computer hardware and medical devices.”
And Bob Ackerman of Allegis Capital added that “While innovation is alive and well, costs are up, staffing is a major challenge, and early-stage capital formation is clearly under pressure in some sectors of the market. Continued macro economic uncertainty certainly does not help on the capital formation side of the ledger.” Another VC contributor observed a “tepid M&A environment.”
Some sectors for investment (e.g. clean tech and life sciences) continue to be under pressure. Bryant Tong of Nth Power stated that “The market continues to be difficult for companies in the clean tech space to get funding.” And Lisa Suennen of Psilos explained “…that while the venture capital world is still frothy and accessible to some, for those in the healthcare business it is a very mixed bag. It is easy to get funding for the next great Internet technology but there is little appetite for deals that address the crisis of the US healthcare system and thus solve extremely meaningful economic problems.” These sentiments are consistent with the findings of the recent MoneyTree™ Report which reported decreases in total capital invested as well as a decrease in the number of deals for life sciences and clean tech in Q1.3
A VC respondent who provided comment in confidence acknowledged that the “medical device centric view of the venture world and things in healthcare have not evolved towards any positive sentiments.” Another respondent also in the life science arena and requesting anonymity elaborated “Available venture capital is shrinking given traditional limited partner concerns about venture capital returns over the last decade (as LPs) are cutting back on their allocations to venture capital. Lack of capital availability is hurting both startup and follow-on financing activity, particularly in healthcare. We are in the down part of the cycle, and will be here for a few years until we can start driving better returns for our limited partners. The good news is that, at least in healthcare, valuations are down and entrepreneurs have a newfound focus on capital efficiency, both of which should enhance returns over the next 3-5 years.”
While opinions varied as to the overall impact of the macro environment on the venture business model in Q1, and challenges continue in some sectors, venture capitalists’ confidence on average continued to rise. In fact, Q1 marked the third consecutive increase in confidence in this quarterly survey. Still, pressures on the overall model continue with funding in some areas becoming more difficult to attain. Thomson Reuters and the National Venture Capital Association reported that despite an increase in the total capital raised, the number of funds launched in Q1 2013 decreased by about one-third from the year earlier quarter, marking the lowest number of funds raised since Q3 of 2003.4 The concentration of available financing among fewer firms is changing the structural dynamics of the venture industry and will necessarily impact the investment strategy of some venture firms (e.g. necessitating larger investments rounds and fewer seed stage deals). Whether less formal modes of seed-stage venture financing will be accompanied by the strategic insight and services typically associated with venture capital firms and what this means for the long term dynamics of the high-growth entrepreneurial environment is unclear at this point.
While the forces of creative destruction (Schumpeter 1934, 1942) apply to the industries that finance innovation and new venture creation as well as to the enterprises that are financed, the impact of these structural shifts on the overall productivity and competitiveness of wide swaths of American business is difficult to predict. However, a more certain macro political and economic environment would go far in supporting the entrepreneurial ecosystem that has nurtured successive generations of world-class enterprises.
Participating Venture Capitalists in the 2013 1st Quarter Confidence Index Survey
|Alain Harrus||Crosslink Capital|
|Bill Byun||7 Capital|
|Bill Reichert||Garage Technology Ventures|
|Bob Bozeman||Eastlake Ventures|
|Bob Pavey||Morgenthaler Ventures|
|Bryant Tong||Nth Power|
|Dag Syrrist||Vision Capital|
|Dan Lankford||Wavepoint Ventures|
|Debra Guerin Beresini||invencor|
|Deepak Kamra||Canaan Partners|
|Elton Sherwin||Ridgewood Capital|
|Igor M. Sill||Geneva Venture Management|
|Jeb Miller||Jafco Ventures|
|John Malloy||BlueRun Ventures|
|Jon Soberg||Blumberg Capital|
|Kurt Keilhacker||Techfund Capital|
|Mark Platshon||Birchmere Ventures|
|Mudit Jain||Synergy Life Science Partners|
|Robert Ackerman||Allegis Capital|
|Roy Thiele-Sardina||HighBAR Partners|
|Sandy Miller||Institutional Venture Partners|
|Shomit Ghose||Onset Ventures|
|Standish O’Grady||Granite Ventures|
|Steve Harrick||Institutional Venture Partners|
|Tom McKinley||Cardinal Partners|
1Publishing 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 entrepreneurial environment. Questions about this on-going research study or related topics should be addressed to its author at Cannice@usfca.edu.
2 Thomson Reuters and the National Venture Capital Association reported a year on year decrease in the number of venture-backed IPOs of 58% and a 73% drop in the number of venture-backed M&As in Q1 2013 (press release dated April 1, 2013).
Mark V. Cannice, Ph.D. is Department Chair and 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.
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