Silicon Valley Venture Capitalist Confidence Index™
(Bloomberg ticker symbol: SVVCCI)
First Quarter – 2021
(Release date: June 18,2021)
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. The Silicon Valley Venture Capitalist Confidence IndexTM for the first quarter of 2021, based on a March 2021 survey of 22 San Francisco Bay Area venture capitalists, registered 3.82 on a 5-point scale (with 5 indicating high confidence and 1 indicating low confidence). The Q1 2021 Index was essentially unchanged from the prior quarter’s reading of 3.83, and confirms the V-shaped recovery in confidence from the pandemic low point 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 stayed nearly constant in the first quarter of 2021 from the last quarter in 2020. This steady measure of sentiment follows three quarters of rapidly increasing confidence since the all-time low point in the first quarter of 2020. This stabilization of the venture investor confidence confirms the recovery in sentiment from the pandemic induced shock to the entrepreneurial environment one year earlier. It also sets the stage for a continuing meaningful level of venture activity for the balance of 2021. In fact, the first quarter of 2021 featured VC fundraising, investment, and exit amounts that exceeded the year earlier quarter2. Investment activity also increased sequentially from Q4 2020, helping validate the increase in investor confidence in Q1. Of course, greater clarity on the emergence from the pandemic and accompanying economic growth boosted confidence as it helps set the context for greater business activity generally, and entrepreneurial activity specifically. In the following, I provide many of the comments of the participating venture capitalist respondents in the Q1 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.
An expectation of a return to pre-pandemic economic activity buoyed optimism. For example, Dag Syrrist of Vision Capital, one of the respondents to the Q1 2021 survey, credited his positive sentiment to the “combination of nearing/line of sight to end of business restrictions from Covid and massive stimulus that will cover and/or replace demand from devastating job losses over the last 12 months.” Mr. Syrrist also pointed to the “high level of capital needing to be deployed” for enhancing the venture environment. Another Q1 VC respondent, John Malloy of BlueRun Ventures, confirmed “The efficient roll out of vaccinations in California and most of the country is spurring new found optimism. Thank you, health care workers & science.” One other VC respondent who requested anonymity noted “Vaccination and reopening is on good progress, which reinstated a lot of pilots and business activities.”
Improving financial metrics, in particular, exit opportunities for venture backed-firms, also supported positive sentiment. For instance, Sandy Miller of Institutional Venture Partners explained “The exit environment is the best it has been in many years. What is particularly exciting is the variety of options now for a company to go public – traditional IPOs, Direct Listings and SPACs. Each has their own pluses and minuses but companies get to choose what is the best fit given their situation. This is allowing more companies to go public which is super healthy for the venture capital ecosystem. It is also bringing out of the woodwork the big tech buyers who have massive cash hordes and strong stock prices and want to acquire companies before they go public or soon thereafter. It is a robust time!” Jeb Miller of Icon Ventures also suggested that it is the “robust exit environment, abundant supply of capital to fund new opportunities, and a tech industry that is working hard to move us all forward through this tough pandemic.” Paul Tuan of Andra Global estimated “a lot of dry powder in the VC space,” and expected that “private company valuations will continue to grow.” Jon Soberg of MS&AD Ventures reiterated “The market is hot and even if it slows down some, it will continue to be one of the most attractive investment options.” Two other respondents noted the “pace of deal flow” and the “availability of risk capital,” respectively.
Improving macro conditions and an expectation of a new creative cycle provided the context for sustained growth. Shomit Ghose of Onset Ventures predicted “Over the long run, the broader economy will begin to recover as the pandemic is brought under control. Innovation will reassert its position as the disruptor of business models, and hence its position as the driver of financial returns.” Tom Baruch of Baruch Future Ventures observed “excess cash in the system combined with more new applications of exponential technologies.” Another VC respondent who provided comments confidentially, detailed “The positives are ample liquidity in the market and an expected surge in economic growth that bodes well for adoption of technology and innovations. This will keep the entrepreneur ecosystem robust in terms of new businesses to fund. The acquisition market will remain strong during a period of robust economic growth because corporations will have liquidity for acquisitions. The big downside is that valuations are stretched very thin. With a good IPO market, SPACs, plenty of private equity, and well-funded companies with high-valued stock, the competition for deals is driving valuations to extremely high levels. A drop in valuations would curtail IPOs and SPACs, but would likely embolden buyers; I don’t see such an event as meaningfully changing what will likely be a boom in startup activity with the re-opening of the economy as entrepreneurs see opportunity in the pandemic-disrupted but re-opening markets.”
Challenges brought on by the pandemic have been met head on by the entrepreneurial organizations of Silicon Valley. Howard Lee of Founders Equity Partners reflected “The pandemic brought about profound changes to work and home globally, accelerating the digital transformation for new end users in new business models and operational processes. Silicon Valley has adapted to this through improved and more secure remote work tools and environments which has led to a decreased dependency on geographical proximity and a departure of startups and talent. With the vaccine rollout underway, there are improved prospects for the local Silicon Valley economy as well as the global economy. A reset of the remote work – in person work dynamic will occur, with a blend of some work from home and in-office presence expected in 2021 as vaccines continue to roll out. As a result, fewer companies and engineers may be expected to leave the area over time. While the IPO market has cooled somewhat in recent weeks, 1st day gains remained above historic levels and secondary transaction activity has continued to increase as founders and executives seek partial liquidity. SPACs have provided an alternative form of liquidity, but it remains to be seen if SPAC deal activity and pricing can be sustained.”
Some concern was raised on the environment of business in Silicon Valley compared to alternative geographies. Alex Fries of Alpana Ventures offered some reasons for concern “…For one is the political situation in California which seems to be increasingly anti-business. This may affect the Valley in the next 1-2 years as companies move somewhere else, employees move and investment dollars chase cheaper locations with great opportunities. Second, due to COVID entrepreneurs and investors realized that one can do business anywhere and everywhere. Also, both parties are looking for opportunities in regions/markets where valuations are low and are not as saturated as in the Valley.” Bob Ackerman of AllegisCyber reasoned “The COVID pandemic has convinced many tech firms that they can work remotely while maintaining productivity. This takes the pressure off the ‘must be in Silicon Valley’ mantra that has driven the success of SV as a location for innovation for decades. In parallel with the fundamental challenges of doing business in SV specifically and California generally (e.g. cost of housing/living, taxes, infrastructure, schools), entrepreneurs are increasingly choosing ‘other’ for a location when starting or expanding their innovation companies.” Another VC respondent who provided commentary in confidence also indicated worry over the “regulatory environment.”
Additional concern was voiced that the pace of recovery may not be sustainable. Steve Harrick of Institutional Venture Partners reported “Valuations are rising too rapidly and risk is being discounted to an extraordinary extent.” Two other VC respondents warned “too many VC tourists pushing up prices to get into hot deals,” and “early stage seems pretty frothy right now, as valuations keep going up (because of) too much money,” respectively.
In summary, confidence among Silicon Valley Venture Capitalists in the future high-growth entrepreneurial environment in the San Francisco Bay Area held steady in the first quarter of 2021. The responding venture capitalists cited progress in the battle with the pandemic that in turn is resulting in improving macro-economic conditions and an improving business climate. More specific to the entrepreneurial environment, strong capital flows in fundraising, investments, and exits are boosting the venture capital industry and ensuring an abundance of financing is available to nurture innovation and new venture creation. Still, concern remained that the evolving post-pandemic economy will rely less on geographic proximity and more on virtual interconnectedness, which will challenge the place of Silicon Valley as the heart of entrepreneurial growth. As other entrepreneurial ecosystems develop increasingly effective support for new venture creation at lower costs, core aspects of the new venture creation value chain will continue to migrate to them. How geographical disruption will impact the leading region of technology and business model disruption is a story that is still unfolding.
1 Dr. Cannice is Professor of Entrepreneurship & Innovation with the University of San Francisco School of Management. Professor Cannice may be reached at firstname.lastname@example.org or by LinkedIn message: https://www.linkedin.com/in/markcannice/
2 PitchBook-NVCA Venture Monitor Report Data Q1 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 and Joe Cannice for their copy-edit assistance. When citing the Index, please refer to it as: The Silicon Valley Venture Capitalist Confidence IndexTM, and include the associated Quarter/Year, as well as the name and title of the author.
The Silicon Valley Venture Capitalist Confidence IndexTM is a trademark of Mark V. Cannice. Copyright © 2004 – 2021: Mark V. Cannice, Ph.D. All rights reserved.