VC Confidence Holds Steady in Quarterly Survey, But Reasons Change

In a survey of 29 Silicon Valley venture capitalists in December, the VCs mulled whether President-elect Donald Trump would buoy up their investment prospects with lower corporate taxes and government regulations, or worsen conditions by heightening global political instability and raising the risk of a major military conflict or economic downturn.

That Q4 2016 edition of a quarterly survey by University of San Francisco business professor Mark Cannice rated the overall confidence of the VCs at 3.81 on a scale of 5—-a number that remains almost unchanged in the latest survey taken in March and published Thursday. But the reasons behind the VCs’ fairly optimistic mood in Q1 2017 are quite different than in the preceding quarter. Political concerns have mostly given way to more routine factors, such as the IPO market and hot innovation trends like artificial intelligence.

“We are off to an excellent start in what should be the best IPO market in many years,” Sandy Miller of Institutional Venture Partners responded in Cannice’s most recent e-mail survey. The survey reports include comments as well as confidence rankings from the venture capitalists. “The first IPOs done this year have worked well and there is a large number of super high-quality companies that are already on file confidentially that are poised to go public. This will give much needed liquidity to the venture capital ecosystem and is long overdue.”

The Q1 2017 report marks the 53rd time Cannice has taken the temperature of venture firm confidence in the Bay Area for his Silicon Valley Venture Capitalist Confidence Index Report. The survey’s numerical confidence index has its own Bloomberg ticker symbol: SVVCCI. Cannice (pictured) has been conducting the survey since he launched it in 2004. He sends out 50 to 60 e-mail inquiries and receives about 30 responses each quarter. The group is like a stable book club—-it’s mostly the same participants each time, though some move away at times and new people come in.

Cannice says it’s a good sign that venture capitalists have returned to their usual business preoccupations, rather than dwelling as much on political uncertainty both in the U.S. and abroad.

“Last quarter there was the most commentary I’d ever seen on macro issues,” Cannice says.

It’s not that the macro concerns have gone away, though. John Malloy of BlueRun Ventures says “protectionism is a worrying trend,” and Dag Syrrist of Vision Capital cited a “lack of visibility and predictability out of DC.’’ Bill Reichert of Garage Technology Ventures says the macro environment is the key external threat.

“The unexpectedly good performance of U.S. and global markets has sustained the positive outlook for the Valley, but this could reverse quickly,” Reichert wrote.

But the bright spot noted widely by the VCs was the pace of innovation. The 30 survey responders pointed to the potential of technologies including artificial intelligence, natural language processing and voice interactivity, virtual reality and augmented reality, cybersecurity, and the commercial exploration of space.

Another theme was technology’s increasing inroads into business operations in all fields. “Technology is transforming all the industries of the world,” Tim Draper of DFJ commented.

Eric Buatois of Benhamou Global Ventures said, “The digitalization of the enterprise is accelerating, creating more and more opportunities for young companies to grow very fast in the [business to business] space.”

The ongoing survey has yielded insights for research papers by Cannice, who is a professor and chair of the Department of Entrepreneurship, Innovation, and Strategy at the University of San Francisco School of Management. He says the confidence ratings of the VCs can serve as an early signal of economic conditions shaping up for the future. If you look at a graph of his quarterly VC confidence index over the years, you can see the number start to slide down steeply in 2007, before it became clear that the collapse of the mortgage-backed securities market would help trigger an international financial crisis and a severe recession between late 2007 and mid-2009.

Cannice says the VCs may seem prescient at times because they’re constantly looking forward three to six months, to gauge whether the IPO market will be robust enough to allow their portfolio companies to go public. Venture investors are constantly in touch with the investment bankers involved in such deals, as well as the limited partners from whom venture capital firms raise money to invest.

The VCs’ comments give a snapshot of conditions for startups and pre-IPO companies these days. Tech businesses are staying private longer and reaching higher valuations. This makes for larger exits, but fewer of them. And it may limit the number of companies that can afford to acquire a tech firm.

Cole Sirucek of Founders Equity Partners also points out, “As these companies stay private longer, solutions to meet employee needs for liquidity has become an important pain point in need of corresponding financial innovations.”

Investors are now asking for more proof of the value of young companies, Bob Ackerman of Allegis Capital said.

“While innovation continues apace, the financing bar has been raised yet again with investors looking for more validation in support of valuations at all stages of start-up development,” Ackerman said. “While painful, the process will result in a healthier start-up environment going forward.”

Bob Bozeman of Eastlake Ventures concurred. “We’re in a resolution phase: from the over-priced to the rationalization stage.”

Photo courtesy of University of San Francisco

Bernadette Tansey is Xconomy's San Francisco Editor. You can reach her at btansey@xconomy.com. Follow @Tansey_Xconomy

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