Silicon Valley Venture Capitalist Confidence Index™
(Bloomberg ticker symbol: SVVCCI)
Second Quarter – 2021
(Release date: August 5,2021)
Mark V. Cannice, Ph.D.1
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. The Silicon Valley Venture Capitalist Confidence IndexTM for the second quarter of 2021, based on a June 2021 survey of 32 San Francisco Bay Area venture capitalists, registered 4.16 on a 5-point scale (with 5 indicating high confidence and 1 indicating low confidence). The Q2 2021 Index surged higher from the prior quarter’s reading of 3.82 and highlights the continuing strong recovery in the entrepreneurial economy since the pandemic low point confidence measure of 2.33 in the first quarter of 2020. Please see Graph 1 for quarterly trend data.
Confidence among Silicon Valley Venture Capitalists in the high-growth entrepreneurial environment rallied in the second quarter of 2021 from the previous quarter, confirming growing strength in the entrepreneurial economy. The high level of VC confidence echoed the robust level of investment in startups at $75 billion in Q2.2 3 Exit activity in Q2 was enormous at $241.3 billion, approaching the entire amount of exit activity in 2020, which itself was a record year for exits.4 This high level of capital flows into ventures and the public markets buoyed confidence among the responding venture capitalists. Enthusiasm about the economy’s increasing reliance on technology, a trend accelerated by the pandemic, also pointed to opportunities for innovation and growth in the near term. While some concern was voiced over inflated valuations and high costs of business in the Bay Area, expectations for the balance of 2021 were decidedly positive. In the following, I provide the comments of the participating venture capitalist respondents in the Q2 survey 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.
The innovation cycle has been shortened by the pandemic. For example, Prashant Shah of Monta Vista Capital indicated “The pandemic accelerated the need for technology in almost every aspect of our lives. There’s no turning back now.” Additionally, Eric Buatois of Benhamou Global Ventures commented “The enterprise transformation toward cloud, AI, and automation has been accelerated two to three years by Covid.” Furthermore, Charles Tan of Lumeira Ventures explained “Innovation continues to thrive in the SF Bay Area. The past year has accelerated digital transformation and increased trust in the secured cloud’s ability to handle critical processing and handling of confidential data. Early-stage and later-stage companies addressing the hybrid cloud’s processing within the core and edge, intelligent delivery of content based on end-point data and traffic patterns continue to drive venture investments. Although there is movement to other parts of the US, the SF Bay Area will continue to be the epicenter of technology innovation.” Standish O’Grady of Granite Ventures also expressed “optimism in general.”
Historic capital availability is providing the fuel for an accelerating startup environment. Dag Syrrist of Vision Capital credited the “gargantuan amount of capital required to be deployed, coupled with the continued low interest environment and the expanded investment opportunities resulting from permanent changes in business process and work environment as economy re- opens,” for his confidence. Nora AlKadi of Graphene Ventures suggested “Low interest rates, VC dry powder, VC participation from non-traditional VC, successful IPOs for VC-backed companies, and the need to recycle returns, as well as the rising appetite to invest in early-stage companies, will fuel innovation and back entrepreneurs.” And Tom Baruch of Baruch Future Ventures called attention to “low interest rates, government stimulus, infrastructure investments and the pervasiveness of the technology underbelly.”
Increasing capital availability is being driven by growing investor appetite for venture investing with the sector’s success. Jon Soberg of MS&AD Ventures emphasized “This is the hottest market I’ve seen and it isn’t slowing down. There is a river of money flowing into VC, and it is growing stronger as LPs are recognizing how important technology investing is to strong portfolio performance.”
A host of exit opportunities have added to the level of capital availability. Jeb Miller of Icon Ventures assured “[The] abundance of capital and lucrative exit alternatives are continuing to fuel startup opportunities to capitalize on the pull forward of digital transformation and online commerce and massively disrupt the legacy laggards.” Sandy Miller of Institutional Venture Partners confirmed “The exit environment for venture capital companies continues to be very robust due to IPOs, direct listings and the occasional SPAC. I think it’s healthy that the bloom is off the rose on SPACs which seemed a sign of speculative success. I think we are in a healthier environment now. There continues to be an amazing group of emerging private technology companies creating very attractive investment opportunities. So, it’s a healthy balance in the market now.”
Tremendous levels of capital have also helped assure growth trajectories of startups and follow on financing, reducing some aspects of risk. For example, John Malloy of BlueRun Ventures said “The post-Covid recovery seems well underway across our portfolio companies. Venture funding is also readily available for companies raising their next rounds.” Shawn Merani of Parade Ventures reported “The amount of growth capital in the market, if a company finds product market fit and shows good unit economics and ability to scale efficiently, there are so many buyers to create a market at the late stage that seed investors will only benefit (this is from a seed investor perspective).”Similarly, Paul Tuan of Andra Capital added “We’re seeing tremendous revenue growth across technology.” Other VC respondents who provided comments confidentially echoed these views. One observed “more capital coming into venture. We think this is the beginning of a new cycle of investing, especially in consumer space with new exciting technologies coming out next year such as glasses.” Another noted “rounds closing easily,” and another relayed “continued access to capital and talent,” respectively.
Excess levels of capital are also driving up valuations. Mohanjit Jolly of Iron Pillar reasoned “There is still a significant amount of dry powder waiting to be deployed. The torrid pace of exits has led to phenomenal returns for LPs who are doubling down on known brands and managers. Those managers are raising larger funds faster resulting in a capital glut in the market. That trend is likely to continue for the foreseeable future resulting in valuation frothiness in the tech startup ecosystem.” Another VC respondent warned of “a huge capital overhang, frothy public markets and high exit valuations.”
Entrepreneurs are responding with passion and focus. Shomit Ghose of Onset Ventures penned “The economic cloud from the pandemic seems to be lifting, which will fuel a marriage of abundant investment dollars with abundant entrepreneurial opportunities.” Philipp Stauffer of Fyrfly Venture Partners concurred, stating “We see extremely attractive deal flow with very talented founders. The crisis helped uncover real problems to solve; entrepreneurs jump in to solve them. Historically, some of the best companies were founded in times of crisis or shortly after.” Dixon Doll of ImpactVC highlighted that the “Bay Area has great diversity of entrepreneurs, including men and women of diverse specialties and nationalities.” And Mark Kraynak of Acrew Capital wrote “We are seeing quite a few very high quality teams in interesting spaces (fintech, security, data, digital healthcare, consumer, and crypto), but there is risk of overheating on valuation and competition for talent.”
Caution remained and centered on the premium to build a company in Silicon Valley. For example, Irene Mingozzi of Lombard Street Ventures shared “…We are seeing some great startups setting up their HQ outside the Bay Area (which was less likely some years ago), but the center of the whole startup/VC/innovation ecosystem is still strongly the Bay Area.” Bob Ackerman of AllegisCyber confirmed “Silicon Valley has the advantage of established infrastructure and incumbency but the cost structure and competition for talent create real hurdles for startups. COVID clearly demonstrated you don’t need to be in Silicon Valley to innovate and we are seeing an increasing number of companies opting either to fully virtualize or set up shop in more favorable locations.”
Is the rapid growth in Silicon Valley startups a crystal ball or a bubble? Bill Reichert of Pegasus Tech Ventures stated “Everyone knows we’re in a bubble. Everyone knows this cannot go on forever. But no one seems to know how this will end, or when. Some investors seem to believe the laws of physics have been repealed. Maybe they’re chasing returns, maybe they’re playing the momentum, maybe they’ve never seen a cycle before? I recall similar conversations the last time. But the good news is that the current innovation ecosystem is very broad-based, in terms of both sectors and geographies, and should be able to absorb, or even ignore, sector-specific disappointments (VR, IoT, AI, autonomy?). And there are plenty of companies around with compelling value propositions and sustainable competitive advantages to justify their valuations.”
A VC respondent who requested anonymity expressed concern, reporting “Valuations are very high and liquidity is also very high with a receptive IPO market, SPAC funding for late-stage private companies, and high fund formation trends. At the present valuations, projected return profiles are low, and that is likely to drive overall funding lower. Up rounds and valuations are elevated at the Series A and B end of the market as well, although not at extremes. The high valuations and speculative capital levels are the primary causes of my middling rating for the market for the next six to eighteen months. The entrepreneur/startup environment is favorable because there is plenty of angel and friends and family seed capital at present. The trend of higher personnel costs is likely offset by the long-term trend of lower office expenses due to the remote work movement. No telling what the costs might be in terms of missed collaboration and lost ‘serendipity value’ of having a lot of smart people together in one office in person.” Meanwhile, another VC respondent blamed “tax policy” for growing concern.
The broader economic and political environment is providing a suitable context for continued regional growth. Alex Fries of Alpana Ventures stated “I am very confident for the next 6-18 months. The economy is coming back more aggressively than many anticipated, stock market is doing great, M&A / IPOs all very strong and there is still much liquidity in the market. Politically, Biden has not rocked the boat much, and California’s governor is being ‘friendly’ before his recall election.”
Howard Lee of Founders Equity Partners provided a comprehensive analysis, writing “The rapid rollout of the vaccines in many parts of the US and the high take-up rate in states such as California and in regions like Silicon Valley have led to dramatically reduced case rates with the resultant reopening of nearly all states. The improved optimism has led to continued increases in fundings of venture-backed companies both in scale and in volume; many companies that have outperformed expectations have raised larger rounds in shorter periods of times to take advantage of the improved fundraising environment and the potential for growth by acquisition. Of course, the increased M&A activity is a result of the have and have nots, where those companies unable to raise sufficient capital in short periods of time are candidates for acquisition by both publicly- traded companies and the well-funded private companies. This is particularly true in cybersecurity.” Dr. Lee, continued, saying “Valuations are also correlated with the US GDP growth, and are expected to remain high with recent US GDP forecasts raised to 7%. Counterbalancing the optimism; however, is rising inflation and the potential for rising interest rates which could dampen both GDP growth and venture fundings and venture-backed company performance. Global uncertainties with respect to COVID-19, vaccinations, and the deadlier variants such as the Delta variant represent another risk to US growth and the global economic growth as a whole. While the IPO markets, and to some extent, the SPAC market for deals, have led to improved liquidity for employees and investors, the median time from first venture funding to exit remains greater than 6 years. As a result, there has been increased interest in structured liquidity programs at later-stage companies, where companies themselves offer partial liquidity for their long-tenured employees as a retention and competitive hiring tool. We believe this programmatic approach to secondaries will continue for the foreseeable future.”
In summary, confidence among Silicon Valley Venture Capitalists in the future high-growth entrepreneurial environment in the San Francisco Bay Area surged higher in the second quarter of 2021. The responding venture capitalists in the Q2 survey highlighted the economy’s increasing reliance on technology-based solutions, a secular trend that has been accelerated by the pandemic. These increasing market opportunities coupled with historic levels of capital availability that fuel startup launch and growth have buoyed VC sentiment to a 14-year high in this quarterly survey. While some concern over inflated valuations due to excess capital along with high costs of business in Silicon Valley were raised, the outlook is very positive given the supporting drivers of capital and technical opportunity in the hands of creative and resilient entrepreneurs. Still, uncertainty remains as the summer progresses and new hybrid models of work are being tried in the face of the ongoing pandemic. Furthermore, inflationary pressures, supply constraints, dynamic monetary and fiscal policies, and international tensions add elements of risk that will need to be discounted against venture growth projections at some point. For now, though, entrepreneurial spirit and determination, supported by the robust Bay Area innovation ecosystem, are building the path for a strong second half of 2021.
1 Dr. Cannice is Professor of Entrepreneurship & Innovation with the University of San Francisco School of Management. Professor Cannice may be reached at email@example.com or by LinkedIn message: https://www.linkedin.com/in/markcannice/
2 PitchBook-NVCA Venture Monitor Report Data Q2 2021.
3 This is the same amount of capital invested as in Q1 although across fewer deals.
4 PitchBook-NVCA Venture Monitor Report Data Q2 2021.
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 – 2021: Mark V. Cannice, Ph.D. All rights reserved.