VC Confidence Hits All-Time Low 4824

A recurring measure of confidence among West Coast venture capitalists has confirmed what every market watcher already knows: market conditions look pretty bleak in every direction. But reading between the lines, VC sentiment might not be quite so negative for start-up firms in life sciences industries.

According to the Silicon Valley Venture Capitalist Confidence Index for the third quarter of 2008, confidence among VCs registered 2.89 on a 5-point scale (with 5 indicating high confidence and 1 indicating low confidence). This reading fell from the previous quarter's reading of 3.07 to a fourth consecutive new low since the index began in Q104, and indicates a continuing downtrend in venture capitalists' confidence (see Table I).

As part of the report, a number of VCs offered their views about the deepening economic crisis and its affects on the venture capital business model. “Venture funds are frozen with uncertainty,” said Dag Syrrist of Vision Capital (Burlingame, CA). “Until some prolonged data showing the economy and markets stabilizing appears, funding will not increase again.”

The index report is prepared quarterly by Mark V. Cannice, PhD, associate professor of entrepreneurship and the executive director and founder of the entrepreneurship program at the University of San Francisco. The report is based on an ongoing survey of San Francisco Bay Area and Silicon Valley venture capitalists. The index measures and reports the opinions of professional venture capitalists in their estimation of the high-growth venture entrepreneurial environment in the San Francisco Bay Area over the next 6–18 months.

“The unprecedented deterioration of macroeconomic conditions and the resulting impact on the venture capital business model were cited most often by this study's responding venture capitalists as the factors that negatively impacted their confidence in the near-term environment for growth ventures,” Cannice writes. “The expanding credit crisis that began in residential real estate and infected the banking and financial system now also weighs heavily on key elements of the VC business model.”

But not all of the report's responding VCs see doom and gloom at every turn. “Some responding venture capitalists expect this might be a good time to launch a firm, noting that history points to the establishment of successful new ventures during difficult economic times,” Cannice observes. “This counter-cyclical sentiment may be based on the lower capital needs of seed-stage firms and the longer term time horizon of the venture industry.”

A few of the report's respondents were still quite positive in their observations—for some markets. “The high-tech entrepreneurial market seems to be immune from the financial crisis that has reached epidemic levels on Wall Street,” said David Pidwell of Alloy Ventures (Palo Alto, CA).

Debra Guerin Beresini of invencor (Menlo Park, CA) suggested that VCs are still able to find significant investment opportunities. “There is no doubt that this is a difficult market for everyone,” wrote Beresini. “With that being said, biotech is still a good bet, and for those firms which invest in specialty commodity companies—especially in food and beverage or ‘green' technologies—there are many opportunities available.”

Can medical technology start-ups ride to the investment party on the coattails of the biotech industry? Nothing in the Q308 report suggests that the responding VCs have a clear notion of where medical device investments might fit into their portfolio rebuilding efforts. But key characteristics typical of medical device start-ups offer a lot of what VCs are seeking.

“I continue to be bullish on entrepreneurship; it's the best part of the economy to be in during times like this,” said Bill Reichert of Garage Technology Ventures (Palo Alto, CA). “Over the near term, some investors and some entrepreneurs will give up, but that will only clear the forest floor for the next wave of entrepreneurs and innovation. If you are lean and scrappy, you've got a tremendous advantage over competitors big and small in times like these.”

Copies of the Silicon Valley Venture Capitalist Confidence Index are available from the Web site of the entrepreneurship program at the University of San Francisco via www.usfca.edu/sobam/nvc/pub/svvcindex.html.

© 2008 Canon Communications LLC

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