Venture capital confidence in Silicon Valley may be returning, according to a newly published study. The Silicon Valley Venture Capitalist Confidence Index, created by University of San Francisco Associate Professor of Entrepreneurship Mark V. Cannice, is based on a survey of venture capitalists on their projections for the Silicon Valley high-growth entrepreneurial environment in the next 6 to 18 months. In the current index, venture capital confidence measured 3.03 on a scale of one-to-five, one being the lowest and five being the highest level of confidence. Last quarter’s rating of 2.77 was a five-year low. Q1 2009 “ended a five-quarter trend of new lows in confidence,” wrote Cannice. The economy has curtailed VC activity. Because of the recession, deals are more difficult to finance, raising funds take more time, and IPOs are becoming less frequent and more distant. Cannice notes that no venture-backed firm has had an IPO in the last two quarters, “the first time on record that this has occurred.” But investors are beginning to see something that’s been in short supply for quite a while.
“This mustard seed of hope appears to be taking sprout among a majority of the venture capitalist respondents who provided their insight to the March 2009 survey,” Cannice wrote.
“And it is nurtured by venture capitalists’ faith in the resilience of entrepreneurs to build efficient enterprises with disruptive solutions, more modest expectations for growth and valuations, and the early stages of a stabilization in the financial system,” Cannice wrote.
Debra Beresini of invencor sees signs of an increase in VC investing, but notes that active firms “are focused on investing into very narrow and specific niche markets.”
Venture capitalists see other positives as well. With less money to spend, funding is going to go to more disruptive technologies, accelerating innovation. Valuations are low, and spending on clean tech remains strong.
Many believe that recession gives impetus to innovation.
“Historically, some of the most successful companies have been started in the middle of a recession,” said Savinay Berry of Granite Ventures. “This is due to the availability of talent, a focus on a lean operating structure, and a self-selection process for raising capital.”
Cannice concludes that “the rise in confidence among Silicon Venture Capitalists in Q1 after 5 quarterly declines provides a sign of hope that recovery is a matter of ‘when’ rather than ‘if’. As the rise in confidence translates to further investment, the emergence of new world class firms is bound to follow.”