VC confidence lags, waiting for “pruning” of startup ecosystem

Bill Reichert of Garage Technology Ventures laments that there is too much money chasing investment fads, leaving, “great entrepreneurs with extraordinary technologies that don’t map to the current hype” stranded.

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TECHFLASH
By Cromwell Schubarth
Jul 28, 2016, 6:40am PDT – Updated Jul 28, 2016, 1:27pm PDT

Silicon Valley venture investors remain wary, despite sitting on unprecedented levels of cash, according to a recent quarterly survey.

The latest quarterly reading of their mood shows VC confidence was up very slightly and remained below the average for the more than 12 years that University of San Francisco professor Mark Cannice has been surveying investors in the region.

Bill Reichert of Garage Technology Ventures laments that there is too much money chasing investment fads, leaving, “great entrepreneurs with extraordinary technologies that don’t map to the current hype” stranded.

What’s most interesting in the report is the insight from some of the Bay Area’s top VCs.

Venky Ganesan of Menlo Ventures, who is the incoming chairman of the National Venture Capital Association, said that he expects the Bay Area venture market to continue to slow due to uncertainty presented by political factors such as Great Britain’s vote to leave the European Economic Union and the U.S. elections.

“This is not a bad thing,” he said. “Healthy trees need pruning and the high-growth venture entrepreneurial ecosystem in the Bay Area needs this. There are too many entrepreneurs in San Francisco who think drinking Red Bull, eating Twizzlers, and playing foosball equates to value creation. This pullback will eventually make the ecosystem stronger and more vibrant.”

The number of U.S. venture-backed firms that went public in Q2 doubled from the previous quarter, but it was less than half the number of the year-earlier quarter. The number of mergers and acquisitions in the second quarter dropped, compared to both the previous quarter and last year.

Howard Lee of Founders Equity Partners said that there is an unusual number of older VC-backed companies with large numbers of employees that are looking for ways to help monetize the options they have earned without going public or being acquired.

“Rather than reflecting a lack of confidence, our conversations indicate the interest of employees and early investors in looking for a way to raise capital to ride out the coming funding winter,” he said.

Bob Ackerman of Allegis Capital warned, “It’s mid-Autumn for Silicon Valley startups and winter is coming. The big question on everyone’s mind – ‘How cold will winter be this time around?’ Questions lead to concerns which lead to a slowdown in capital flows.”

Bill Reichert of Garage Technology Ventures lamented a “hype cycle” that is accelerating, both on the upside and downside.

“Big Data and Internet of Things are so last year,” he said. “Latecomers to artificial intelligence are chasing that sector up the hype curve at an exponential rate. Poor EdTech, DealTech, AgTech, FashionTech, CleanTech, (are) faded darlings.” he said. “Deep understanding and patient investing are being threatened by the hunt for unicorns and bragging rights around hot deals. Great entrepreneurs with extraordinary technologies that don’t map to the current hype are left stranded.”

Still, some of the VCs in the latest report are taking heart in the only tech IPO of the year from the region. San Francisco-based Twilio raised $150 million last month and its stock has more than doubled since. Redwood City-based Talend is set to become the second, expecting to price its offering Thursday and start trading Friday.

“What a difference a day can make,” said Sandy Miller of Institutional Venture Partners. “It looks like the stage is set for a recovery in the IPO market. We have been in a situation where all the fundamentals in the venture industry have been in place except for a robust IPO environment. I would expect to see a number of firms moving into the market now.”

The reading for the second quarter was 3.6 on a scale of 1 for low confidence and 5 for high confidence. That’s up from the reading of 3.54 in the first quarter, but below the average of 3.71.

Cromwell Schubarth is TechFlash Editor at the Silicon Valley Business Journal.