Silicon Valley Venture Capitalist Confidence Index™ – Second Quarter – 2020

Silicon Valley Venture Capitalist Confidence Index™
(Bloomberg ticker symbol: SVVCCI)

Second Quarter – 2020
(Release date: August 13,2020)

Mark V. Cannice, Ph.D.¹

University of San Francisco School of Management

The Silicon Valley Venture Capitalist Confidence IndexTM (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.² The Silicon Valley Venture Capitalist Confidence IndexTM for the first quarter of 2020, based on a March 2020 survey of 26 San Francisco Bay Area venture capitalists, registered 2.33 on a 5-point scale (with 5 indicating high confidence and 1 indicating low confidence). This quarter’s Index measurement plummeted from the previous quarter’s Index reading of 3.6 and is the lowest reading of VC confidence in the over 16-year history of this on- going quarterly research. Please see Graph 1 for quarterly trend data.

Confidence among Silicon Valley Venture Capitalists in the future high-growth venture entrepreneurial environment in the San Francisco Bay Area bounced back in the second quarter from an all-time low point in the first quarter of 2020. The Q2 2020 reading of 3.0 showed a significant increase of confidence above the previous quarter’s reading of 2.33, but it is still the second lowest measure of confidence in over eleven years since the Great Recession (Q4 2008). While a belief that uncertainty brings opportunity lifted confidence somewhat, sentiment was constrained by a lack of clarity on the future of the national and global economy and the role that Silicon Valley will play in it. Validating this uncertainty, the number of investments in Q2 declined significantly from the previous and year-earlier quarters; however, total capital deployed was nearly flat.3 The number and value of exits of venture-backed firms also declined in Q2 as compared to the previous and year-earlier quarters, highlighting the fragility of the venture capital business model in the current environment.4 Still, the rise in confidence brought some hope that recovery and opportunity will appear eventually. In the following, I provide many of the comments of the participating venture capitalist respondents that validate their confidence rating 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.

Change is the only constant. Venky Ganesan of Menlo Ventures stated “The pandemic has changed everything. What used to happen in decades is now happening in months. The digitization of the economy has been turbo charged and every element of what we do that can be digitized is being digitized. This is as big as the Internet in terms of transformation and will open a new era of opportunity for entrepreneurs. Venture capital returns are driven by change and we are at an inflection point of maximum change. Carpe Diem.” Sandy Miller of Institutional Venture Partners shared “This is the most unusual and unsettling time in my professional life. While many businesses and people are struggling, there are a number of companies that continue to grow and thrive. The stock market reflects the underlying strength long-term of the tech sector and the US as the place where wealthy investors and institutions worldwide want to put their money. Accordingly, the stock market is likely to remain strong allowing an active IPO market. Private valuations have certainly moderated. So, on balance, there is reason for optimism in the venture capital industry. But our industry and the companies we support need to change to meet the realities of a reset of our culture and our economy.”

Jeb Miller of Icon Ventures pointed to “continued uncertainty around the economic impact of the pandemic compounded by the recent debilitating immigration policies and the likely permanent shift to remote work.” Meanwhile, Tom Baruch of Baruch Future Ventures indicated high confidence “but for uncertainty regarding COVID-19.” Similarly, Jon Soberg of MS&AD Ventures and Standish O’Grady of Granite Ventures also confirmed “COVID-19” as a cause for prudence. Additionally, two VC respondents who provided comments confidentially, predicted “economic and market uncertainty,” and “continued uncertainty due to the pandemic; new investments will drop,” respectively.

Pull backs typically create opportunities. Bill Reichert of Garage Technology Ventures reasoned “We knew there had to be a correction, that too many companies were overvalued, but no one imagined that this is how the market would correct. The Silicon Valley venture ecosystem certainly survive this correction, but there will be some clearing of the forest floor as the upcoming recession whacks a significant number of companies and funds. On the bright side, there is a ton of money out there looking for somewhere to go, and savvy LPs and VCs know that investing during the soft part of the cycle is the best time to invest.” John Malloy of BlueRun Ventures added “The initial shock to the system has been absorbed. The world is definitely changed but startups have and will continue to adapt to the new realities faster than incumbents. Global economic recovery begins with viable vaccines which are likely towards the end of this timeframe.”

Liquidity creates safety and optionality. Alex Fries of Alpana Ventures offered “I still think that the excess cash in VCs’ bank accounts will keep flowing. Even if COVID comes back, I believe investors will not be shocked anymore. We know the drill. The startup with a high burn-rate may suffer, since without revenues, it will be hard to keep them running as is.” A VC respondent who provided commentary in confidence noted “Recent historical events have accelerated behavior change which creates new opportunities and accelerates existing companies. Pretty exciting time to be launching a new fund.” Extending this point, Mohanjit Jolly of Iron Pillar explained “There is a confluence of two macro trends driving investment decision making in the current environment: 1) availability of ample capital that VCs have to deploy, even if it means doing so without potentially meeting entrepreneurs in person; and 2) uncertainty in the COVID era where no one truly knows how this will really play out, not just in the US but globally, driving investors to simply sit and wait until some steady state of normalcy, if they have that luxury.”

Firms need to navigate uncertainty with an eye on their true north missions. Ricky Lu of Cybernaut Zfounder Ventures said “We expect the Covid-19 pandemics to linger and continue to negatively impact the startup activities in Bay Area. Building mutual trust and confidence through remote meetings is hard, and thus we’ve seen continued decline in fundraising activities. Our portfolio companies are suspending or halting high-expense R&D projects while focusing more on projects that can generate near term cashflow.”

While some venture capital respondents identified potential opportunities in the current chaos, others reminded of the challenges still to come. For example, Kurt Keilhacker of Elementum Ventures observed “extreme caution from ecosystem of what’s around the corner, and general fatigue with mere business model innovation start-ups.” Mr. Keilhacker, continued, highlighting “still strong interest in real technologies and their capacity to change markets.” Another respondent warned “There is a good possibility of a medium-term recession. But it will affect tech companies selectively as behaviors change regarding delivery, travel, work from home etc.; some companies will thrive, others will stagnate.”

There may be another economic shoe to drop, but how big will it be, and where will it land? Dag Syrrist of Vision Capital argued “The disconnect between equity markets and real-economy unemployment would suggest that stimulus and fed policy is driving this for now, and therefore, suspect there’s no practical way for GDP to not be adversely effected longer term, and bringing folks back into the workforce after the devastating lay-offs. Mix that with election year circus, and fully-absent leadership on the health crisis, I would anticipate a pullback on the venture side after the initial wave of self-congratulatory ‘we’re just fine, and our portfolio companies are all amazing, nothing to see here’ e-mails floating around.” Bob Ackerman of AllegisCyber concluded “The COVID-19 pandemic and the resulting virtualization of Silicon Valley work forces (likely long term) is likely to lead to a decentralization and deceleration of work force growth in the Valley. Combined with a likely increase in taxes and the already high cost of living in the Bay Area, one can see we are on road to the end of Silicon Valley’s innovation hegemony. It’s not the end, but it is the beginning of the end…”

Finally, Howard Lee of Founders Equity Partners detailed “The continued negative economic impact of the COVID-19 pandemic will be felt in varying degrees across the nation for the foreseeable future, including Silicon Valley, until effective treatments and a vaccine are available. The uncertain economic environment combined with persistently high unemployment will lead investors to remain cautious and to focus on existing portfolio company support instead of expansion into new investments. While valuations may remain flat or declining for many companies, those companies with exceptional performance and growth rates during this pandemic will attract both capital and a valuation premium. Additionally, sectors such as COVID-19 healthcare and drug development, communications infrastructure to support a remote workforce, and telemedicine are centers of investment attention. Despite the recent announcements of public offerings through a traditional IPO or direct listing, the small number of exits forecasted in 2020 will continue to exacerbate the problem of lengthened times to exit for venture-backed companies, leading many employees and existing shareholders to consider secondary sales to address increasingly urgent partial liquidity needs. We believe these liquidity trends will continue in the SF Bay Area in the face of economic uncertainty and the potential for a prolonged downturn.”

Still, the positive philosophy of entrepreneurship continues. Tim Draper of Draper Associates urged “The world needs entrepreneurs NOW. Unemployment is at an all-time high. Freedom is being challenged by controlling governments around the world. WE need entrepreneurs to show us the light to making the next decade better.”

In summary, while sentiment among Silicon Valley venture capitalists recovered somewhat in the second quarter of 2020 from the initial start of the pandemic in Q1, it is still at the second lowest reading since 2008. While uncertainty provides some opportunities in specific sectors, the unprecedented jolt to societal and economic norms may disrupt the traditionally disruptive entrepreneurial region of Silicon Valley. To get from here to a future state of more manageable business protocols will take discipline, patience, and the enduring entrepreneurial optimism that has emanated from the origins of this region for decades. For now, vision to anticipate what’s next and hard work to execute a plan to get there is the order of the day.

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1 Dr. Cannice is Professor of Entrepreneurship & Innovation with the University of San Francisco School of Management. https://www.linkedin.com/in/markcannice/

2Questions about this ongoing research or related topics may be sent to Prof. Cannice at Cannice@usfca.edu or by LinkedIn.

3PitchBook-NVCA Venture Monitor Report Data Q2 2020

4 PitchBook-NVCA Venture Monitor Report Data Q2 2020

Mark V. Cannice, Ph.D. is 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 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 – 2020: Mark V. Cannice, Ph.D. All rights reserved.