Silicon Valley Venture Capitalist Confidence Index™
(Bloomberg ticker symbol: SVVCCI)
First Quarter – 2019
(Release date: June 24, 2019)
Mark V. Cannice, Ph.D.
University of San Francisco School of Management
The Silicon Valley Venture Capitalist Confidence Index™ (Bloomberg ticker symbol: SVVCCI) is based on a recurring quarterly survey (since Q1 2004) of Silicon Valley/San Francisco Bay Area venture capitalists. The Index measures and reports the opinions of professional venture capitalists on their estimations of the high-growth 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 first quarter of 2019, based on a March 2019 survey of 26 San Francisco Bay Area venture capitalists, registered 3.63 on a 5-point scale (with 5 indicating high confidence and 1 indicating low confidence). This quarter’s Index measurement climbed significantly from the previous quarter’s Index reading of 3.20 which was the lowest level since Q1 2009. Please see Graph 1 for trend data.
Confidence among Silicon Valley Venture Capitalists jumped in the first quarter of 2019 from the previous quarter. The increase in sentiment was tied primarily to the expectation of much improved exit opportunities led by a number of high profile IPOs. This expectation of better exits was confirmed by the data as the total value of exits increased in Q1 over the previous and year-earlier quarters (although the number of exits decreased).2 Interestingly, the number of deals being funded in Q1 also declined from the previous and year-earlier quarter – highlighting the continuing focus on very high potential capital-hungry ventures.3 Confidence in the Bay Area as the primary destination of world class entrepreneurial talent seeking and building innovative products and ventures was also sustained. However, concerns on the rising costs of work and life in the Bay Area along with frothy valuations and broader macroeconomic and political concerns kept a check on the overall rise in confidence. In the following, I provide many of the comments of the participating venture capitalist respondents that validate their sentiment 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.
The healthy exit environment and the virtuous circle of capital deployment it may create buoyed confidence among a number of venture capitalist respondents. Jeb Miller of Icon Ventures attributed his high confidence to a “healthy exit environment with bellwether IPOs planned this year and a vibrant M&A market.” Mr. Miller continued, saying “The Bay Area remains the epicenter of startup activity with ample capital and resources to support the macro trends of digital transformation and data-powered applications and industry solutions.” Sandy Miller of Institutional Venture Partners also confirmed “The IPO market is wide open with the highest profile tech companies finally coming to the market, and the strong IPO market will drive a more active M&A market as well. As a result, 2019 should be a robust year for tech venture exits.”
Estimating the impact of the robust IPO market Mohanjit Jolly of Iron Pillar explained “Despite the talk of a market pull back or significant correction, there is euphoria around the parade of IPOs and significant liquidity that will be generated for LPs and GPs in the coming months. That, in turn, is leading investors and entrepreneurs to believe that the momentum is going to continue at least for the foreseeable future. The IPO windfall is bound to create many new young angel investors especially in Silicon Valley which is sure to catalyze a new wave of tech entrepreneurs.” Additionally, Chenxi Wang of Rain Capital suggested “The market could go through a correction, but we are still seeing a high amount of capital pouring into good projects.”
Furthermore, Dixon Doll of Impact VC detailed “I am as optimistic as I’ve been in several years about having a very robust entrepreneurial environment, including exit opportunities (both M&A and IPO) over the next 6 to 18 months. Due to the fairly slow liquidity environment of the past two to three years over most of the world, there is a fairly large pent-up demand for liquidity by both investors in venture capital and the portfolio management teams, especially here in the greater Bay Area including SF. Other positive factors are the strong Q1 2019 stock market and a relatively strong backlog of IPO filings for such companies as Uber, Lyft, Pinterest and others…Many other publications read by the venture industry echo this optimism and have been doing so for the last few months. The National Venture Capital Association…is echoing many of these optimistic outlook factors. Finally, there continue to be many new applications for such new technologies such as artificial intelligence, autonomous vehicles, semis, wireless/mobile and a host of life sciences related opportunities that are in the earliest phases of deployment and implementation.”
The amount of entrepreneurial talent continues to increase. Eric Buatois of Benhamou Global Ventures commented “The quantity and quality of companies coming from outside Silicon Valley arriving here to establish their business development and marketing function with innovative ideas is increasing steadily. It is accelerating the innovation learning cycle with various diverse viewpoints.”
Reflecting on the impact of macro-economic issues, Ricky Lu of Cybernaut Zfounder Ventures said “The decline of economic readings and the global stock market in Q4 2018 scared both investors and entrepreneurs. Over the period of Q1 2019, we observed the decline in the quality and total number of start-ups that were fund-raising. However, we also see that economic readings are recovering, reflected by the strong performance of the stock market. It will likely restore entrepreneur’s confidence in economics, and, thus, they are more likely to go out and raise money. On the other hand, the truce of US-China trade war will also contribute to the recovery of investment.” Bill Reichert of Garage Technology Ventures added “After the scare in December, the markets are holding up much better than most of us expected.” More broadly, Standish O’Grady of Granite Ventures linked his sentiment to “confidence in U.S. entrepreneurship, innovation, and the capitalist economic system.”
Renata George of Zenmen offered “My level of confidence hasn’t changed much from the past quarter because what I am currently seeing in the market is adjustment. VCs pay a little more attention to the actual revenue of the startups and other financial performance indicators to hedge their risks, but they still have to invest their dry powder, so I don’t see a significant slow-down of investments or drop in valuations just yet.” Another VC contributor who responded in confidence offered a detailed analysis, saying, “The change in stance by the Federal Reserve to a neutral to potentially accommodative monetary policy will likely provide support to the public markets, which will be receptive to IPOs. That public liquidity is a significant factor in determining the amount of capital that will be devoted by institutional investors to venture capital funds. Accordingly, if fund formation is robust, then capital will be available for entrepreneurs. Emerging trends in entrepreneurial ventures that continue to attract capital will be the connected and autonomous automobile, sensor technology, analytics, genetic medicine, energy storage, and the merging of IoT/edge computing/sensors/AI.”
A more cautious outlook was voiced by some. Kurt Keilhacker of Elementum Ventures pointed to “market conditions” for his moderate confidence. Also taking a less sanguine view, John Malloy of BlueRun Ventures shared “Tech IPO optimism helps counter some of the effects of Tecklash. Overall outlook remains choppy.” And Shomit Ghose of Onset Ventures confirmed that there are “330 unicorns today with $1.1 trillion in valuation, and macroeconomic headwinds looming. ‘Nuff said.’” And a VC respondent who provided comments off the record, warned of “Unsustainable valuations coupled with the high cost of living and hiring people.”
Also concerned by macro issues, Dag Syrrist of Vision Capital stated “It feels like a growing sense of malaise seems to be setting that we’re in a permanent state of political and economic upheaval. At the macro level the short-term boost of the tax cuts is wearing off, and at the micro level there’s more cautious decision-making on the part of funds, especially larger ones not wanting to be caught with little dry powder when a down turn starts. Business cycles have not become extinct, and it’s unrealistic to assume the economy will behave differently simply because much of the current venture community have never deployed capital in anything but an up market.”
Additionally, Howard Lee of Founders Equity Partners offered “While valuations appear to be stabilizing, high living costs continue to persist. This is likely to be exacerbated by the recent IPOs of Silicon Valley companies and the pipeline of other announced IPOs from companies in the Bay Area as employees in these local companies will soon have realizable wealth. More companies continue to expand engineering resources outside the Bay Area to build their businesses in lower cost regions and to seek relief from both high living costs and competitive hiring pressures from the large incumbent tech companies such as Facebook and Google.” Similarly, a venture respondent requesting anonymity reported “Teams are moving away from Bay Area.” The same respondent was also worried over “too many mega rounds;” and the fact that as “fund sizes have doubled or tripled, round sizes have doubled and tripled as well, and folks are looking at SE Asia and Latin America.” Meanwhile another VC contributor was concerned over “current tax prospects for carried interest and capital gains at Federal and California levels.”
Emphasizing competitive pressures for top talent, Robert R. Ackerman, Jr. of AllegisCyber noted “While we are clearly in the later innings of this innovation cycle, there are other unique factors in the Bay Area that are putting the local innovation ecosystem at risk. The dominance of ‘Big Tech’ in Silicon Valley is creating a competitive environment for technical talent that puts startups at a significant competitive disadvantage. In essence, Big Tech is pricing startups out of the market in Silicon Valley, a fact that will become all too apparent when this cycle comes to an end and the current excess of investment capital ebbs. Big Tech is killing Silicon Valley.”
Another VC respondent contended “The looming negative continues to be high valuations and bringing to the public markets unprofitable companies that may trade below their IPO prices after the lock-ups expire typically 180-days after the IPO. A slew of underperforming IPOs may close the window on venture capital backed IPOs for some period of time that would negatively affect the institutional flows of capital into venture funds. Also, a reversion to the mean of public valuations would cause a substantial decline in the major public stock market indices, that decline would make bringing companies public more challenging. A potential long-term negative far off in the future is the rate of entrepreneurial startups. There have been some recent studies indicating that the number of startups as a percentage of all businesses has been declining for a number of years If true, this could have long-term negative effects on the innovation economy.”
In summary, confidence among Silicon Valley Venture Capitalists in the near term high-growth entrepreneurial environment bounced back in the first quarter of 2019. Expectation of a much improved IPO market was the primary driver of this rise in sentiment. In hindsight, these expectations for an improved exit market were borne out with the enthusiastic response of the public market to many of the venture-backed firms that grew in the Silicon Valley entrepreneurial ecosystem. Additionally, continued development of transformative technologies and business models crafted by a globally diverse set of entrepreneurs continues to set the stage for new rounds of market opportunities.
Of course, fewer and larger exits than the previous and year-earlier quarters point to the continuing trend of ‘winner takes all’ markets – the impact of which on innovation and long term competitiveness is unclear. Also unclear is how the local liquid wealth generation of these public offerings will impact overall new venture creation. That is, whether this new liquidity will primarily go back into funding new ventures or into buying new homes, thus, continuing to drive up the cost of living in the Bay Area and making new talent harder to attract. In summary, while confidence rose in the first quarter due to the arrival of a robust exit environment, it was kept in check somewhat by a continued concern over high valuations of many firms, unsustainable costs of business and life in the Bay Area, and macro-economic and political issues. An interesting milestone for the venture environment will be the arrival of the end of the lock up period for many of these newly public firms, the impact on public market valuations, and the resulting flows of capital and talent in the region.
2 Pitchbook-NVCA Venture Monitor Report Data Q1 2019.
3 Pitchbook-NVCA Venture Monitor Report Data Q1 2019.
Mark V. Cannice, Ph.D. is Department Chair and Professor of Entrepreneurship, Innovation, and Strategy 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 Jack Cannice, James Cannice, and Joe Cannice for their 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 trademark of Mark V. Cannice. Copyright © 2004 – 2019: Mark V. Cannice, Ph.D. All rights reserved.