Silicon Valley Venture Capitalist Confidence Index™
(Bloomberg ticker symbol: SVVCCI)
Third Quarter – 2020
(Release date: November 19,2020)
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. The Silicon Valley Venture Capitalist Confidence IndexTM for the third quarter of 2020, based on a September 2020 survey of 31 San Francisco Bay Area venture capitalists, registered 3.39 on a 5-point scale (with 5 indicating high confidence and 1 indicating low confidence). This quarter’s Index measurement rose for the second consecutive quarter from the all-time low reading of 2.33 in the first quarter of 2020. Please see Graph 1 for quarterly trend data.
Confidence among the responding Silicon Valley venture capitalists in the Q3 2020 survey climbed notably higher from the previous two quarters as the grip of the global pandemic that has brought immeasurable human suffering and economic turmoil has also sped up the adoption of technology, much of which has been developed and commercialized by Silicon Valley firms. Furthermore, government led liquidity growth has made capital plentiful and in search of private as well as public equity opportunities. The sustained rally in the public markets, despite the pandemic induced economic shock, has also led to additional exit opportunities for venture-backed firms. Specifically, the rising prices of pubic technology companies’ stocks are lifting the value of their equity currencies that are available to finance private acquisitions at relative bargains. Furthermore, increasingly popular alternative public market entry vehicles such as direct listings and special purpose acquisition company mergers have eased the burden of attaining public status and so have been accretive to total liquidity events. In fact, total capital raised in exits in Q3 nearly quadrupled the amount raised in the previous quarter and more than doubled the amount raised in the year-earlier quarter, confirming a robust exit market for venture-backed firms.2 Additionally, fundraising totals in 2020 have already exceeded the amount raised in 2019, indicating ample capacity for future investments.3 Still, the number of venture capital investments in terms of the number of deals and total capital deployed in Q3 decreased from Q2 (although total capital invested was higher than the year-earlier quarter).4 Perhaps most concerning for the long term health of the venture environment, the number of seed stage investments was the lowest since 2012.5
Upon viewing the graphical trend, the rise in venture capitalist confidence does project (the oft cited) ‘V-shaped recovery’ in VC sentiment which correlates well with increasing capital flows, both private and public, into those organizations that are the modern weavers of the digital economy. In the following, I provide many of the comments of the participating venture capitalist respondents in the Q3 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 adoption of technology has accelerated during the pandemic, creating demand for the innovations developed by Silicon Valley venture capital portfolio companies. Venky Ganesan of Menlo Ventures assured “The pandemic has accelerated digitization in an unprecedented way. What used to happen in decades is now happening in months. These fundamental behavior changes and paradigm shifts are not temporary and are in many cases irreversible. We are going to see a massive transition in the economy from physical companies to digital companies.” Ho Nam of Altos Ventures concurred, saying “Covid is accelerating digital transformation of many industries. Many changes will be permanent.” Kurt Keilhacker of Elementum Ventures noted the same trend, confirming “While there are a lot of unknowns with the pandemic, it is increasingly clear new technology adoption has only accelerated.”
The exit environment has been strong with newly popular paths to public status. Sandy Miller of Institutional Venture Partners stated “The best news for the venture ecosystem is the remarkably robust and diverse exit environment. We have an unprecedented number of IPO options with traditional IPOs working well, the availability of direct listings, and now the plentiful availability of SPACs hungry for product. At the same time, the big tech companies are more flush with cash than ever, fueling M&A interest. So this year and next should be an amazingly good exit environment for venture-backed technology companies.” Another VC respondent who requested anonymity elaborated “There is plentiful capital and a robust public market with ample liquidity, including the new SPACs, which are providing an alternative exit for late stage companies. There is also a lot of capital looking for good opportunities in the life sciences industry. This should contribute to healthy fund formation during this upcycle in the markets. Those are all positives. The negatives…are:(1)the pandemic is restricting in-person collaboration, which is so critical for small entrepreneurial start-ups, and I am concerned that will diminish the number of startups and diminish the effectiveness of teams in existing early-stage companies; there is no substitute for the in-person ‘bunker’ mentality of a startup that simply cannot be replicated in an online world no matter how ‘immersive’; (2) valuations are very high, which makes finding good values for investing capital arduous.”
Jeb Miller of Icon Ventures also observed the “robust exit environment with vibrant IPO and M&A successes that are refueling the risk tolerance for new projects. The Bay Area remains the epicenter of technology startup activity, although the rise of distributed work forces and the shift to online / remote work will lessen the dependence on building teams in this high cost region.” In fact, record setting public markets have cleared a path for venture-backed firms. Paul Tuan of Andra Capital noted the “tech public markets have already recovered and primary markets will follow with a slight lag.”
Venture capital firms’ coffers are ample. Mohanjit Jolly of Iron Pillar highlighted the “…record capital on the sidelines. And given the tsunami of exits and IPOs, there is optimism overall around technology investments, and I anticipate that excitement to lead to active investments over the near future.” Chenxi Wang of Rain Capital also expressed optimism “based on recent fundraising activities and also budgeting and purchase patterns of companies.” Another venture capital respondent who provided commentary in confidence emphasized there is “lots of cash available due to artificially low interest rates.”
Public policies are creating opportunities and challenges for the high-growth venture ecosystem. Dan Miller of Roda Group pointed out “The public and policymakers are starting to take climate change seriously. I expect a significant increase in government incentives to rapidly transition to a clean energy economy. This will drive investment, development, and deployment across a wide range of technologies.” Taking note of government-induced challenges, Tim Draper of Draper Associates contended “Normally in a time like this with a new open field Post-Covid, with new technologies around bitcoin, artificial intelligence, and surveillance rising to transform the biggest industries in the world, I would say a 5, but I am very concerned about the brain drain out of California because of the bad policies driven by union bosses in our monopolistic (single party) state. They don’t seem to understand that free markets, exceptional education, clean streets, low regulation and low taxes encourage the innovators and industrialists to come to your state. People who create value should benefit from that creation or they will go somewhere where they are better rewarded and appreciated.”
Despite the ample exit opportunities and capital availability, a Darwinian process of portfolio firm survival is underway. Lokesh Sikaria of Moneta Ventures reported “The COVID-19 crisis has tested many of the startups and the strongest of them are thriving. This gives us tremendous opportunities to invest as VCs.” John Malloy of BlueRun Ventures concluded “Most startups and investors have adapted to this new ‘normal’.” Similarly, Steve Harrick of Institutional Venture Partners observed “Technology companies are proving to be particularly resilient during this time of dislocation. Accordingly, capital continues to flow freely for promising, digital businesses and the IPO market is robust. That said, I expect substantial volatility in the months to come and a rocky road as we progress toward the new normal.”
Other venture capitalist respondents were somewhat less sanguine. Alex Fries of Alpana Ventures relayed “The fact that COVID came back in high numbers in Europe, makes me a little more careful. Nevertheless, VC investments are still solid and the tickets are getting larger. If the stock market goes down (aka crashes), then I may be even more negative.” Likewise, Standish O’Grady of Granite Ventures indicated “COVID-19 is offsetting an otherwise pretty healthy technology environment.” Jon Soberg of MS&AD Ventures also identified “lots of uncertainty with elections, economy and markets, but startups and tech are the best place to be.”
Dixon Doll of Impact VC detailed “My confidence is low to medium for the next 2 months (plus or minus) till after the election is clearly resolved. Then I think things will rapidly evolve with increasing clarity, especially after the Covid crisis resolution gets at least more clarity regarding timing. Once both of these major uncertainties are reduced to more traditional levels, things in the Bay Area will again resume their traditional world-leading role.”
Dag Syrrist of Vision Capital shared he “can’t easily reconcile the job losses, uncertain federal support, congressional grid-lock, deficit spending and election circus with the S&P and happy stock market. The Fed is creating liquidity as if that is a never-ending opportunity, so seems to me we’ll eventually have to face a pro-longed slow-growth/recession line economy. Off-setting this will be opportunities for venture to back new opportunities resulting from the changing landscape, which in my view will result in many interesting ways to deploy capital but also force many businesses to give up.” Furthermore, Bob Ackerman of AllegisCyber warned “The hens have come home to roost. The toxic combination of high costs and dysfunctional government are well on their way to killing the Golden Goose that once called Silicon Valley home. With even higher taxes in the forecast and livability in San Francisco dropping through the floor, ‘anywhere but Silicon Valley’ may become a popular reframe. Silicon Valley is still home to much of the Venture Capital community but the $$$ will follow the opportunities…” And Tom Baruch of Baruch Future Ventures foresaw sentiment “tipping to fear and uncertainty in overinflated general financial markets leading to trickle down to startups.”
Other hurdles remain as well. Bob Pavey of Morgenthaler Ventures asserted “Covid and high State taxes are issues.” Several other VC respondents who gave commentary in confidence signaled alerts as well. One suggested “A lot of capital at early stage and valuations seem to be rising, when we were expecting valuations to decrease because of Covid. Market seems very frothy.” Another mentioned “I think the overhang from the macroeconomy will continue to deflate the financing landscape for early-stage startups.” Yet another reflected “The economic activities are recovering from the pandemic but path to full recovery is still unclear until an effective vaccineis available. The Bay Area venture community is active on digital health and online education investment.” One more speculated “Given the WFH culture, it would not surprise me if startups also begin to move out of the Bay Area.” And one pointed to “political, tax and market risk,” respectively.
Providing a comprehensive analysis Howard Lee of Founders Equity Partners explained “Fundraising for startups is now bifurcated between those companies with resilient business models and uninterrupted growth through the pandemic and those with still unproven and unvalidated business models and limited customer traction. The recent increase in initial public offerings which have included Snowflake, JFrog, and direct listings such as Palantir and Asana, as well as the rising share of tech M&A deals have provided some needed momentum for the capital markets, reaffirming the resiliency of the tech market during this pandemic. Nonetheless, exits remain a concern for the broader tech market, and liquidity for investors and employees will be important as the pandemic continues to lengthen the exit timelines and work from home and limited reopenings put pressure on the Bay Area economy. The valuations (bid-ask spread) on the secondary market are narrowing as sellers are seeking partial liquidity in the face of longer exits exacerbated by the pandemic. Anecdotally, the Bay Area continues to see both a migration of engineering talent to other less expensive regions of the country and companies increasing their hiring of engineers outside the Bay Area to work remotely. Volatility in the capital markets is expected to remain in the runup to the general election amidst an uncertain economic recovery.”
In summary, confidence among Silicon Valley Venture Capitalists in the future high-growth entrepreneurial environment in the San Francisco Bay Area improved for a second consecutive quarter; however, it still remained below the nearly 17-year average for this Index. While the on-going uncertainty of the pandemic and broader macro issues continued to weigh on confidence, evidence that the technologies being developed by VC-financed firms are helping mitigate some of the impact of the pandemic supported sentiment. Specifically, those technologies that allow for a ‘new near-normal’ type of business functioning during these extraordinary times are highly prized and awarded commensurate attention and valuations. Still, the macro context in which venture-backed startups must operate is not unscathed by the ravages of the global pandemic. The persistent challenges faced by Silicon Valley startups (e.g. cost of housing) combined with greater remote work expectations and flexibility may overtime tip the decision of some/many firms to operate in other less costly regions. Whether this trend is the acceleration of a natural evolution of this hub of new venture creation to a core activity value chain model where finance/strategy functions are based locally while operating functions are distributed, or we can expect the dislocation of entire future industries, remains to be seen. For now, we continue to create, to work, and to hope. Be well.
1 Dr. Cannice is Professor of Entrepreneurship & Innovation with the University of San Francisco School of Management. https://www.linkedin.com/in/markcannice/
2 PitchBook-NVCA Venture Monitor Report Data Q3 2020
3PitchBook-NVCA Venture Monitor Report Data Q3 2020
4 PitchBook-NVCA Venture Monitor Report Data Q3 2020
5 PitchBook-NVCA Venture Monitor Report Data Q3 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.