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VC Confidence Hits All-Time Low

BUSINESS NEWS

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. 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 it indicates a continuing downtrend in venture capitalists' confidence (see Table I).

Quarter
and Year
Confidence
Index
Q104
4.3
Q204
4.1
Q304
4.05
Q404
3.97
Q105
3.96
Q205
4.13
Q305
3.97
Q405
3.97
Q106
4.15
Q206
3.78
Q306
3.88
Q406
3.89
Q107
4.38
Q207
4.15
Q307
4.14
Q407
3.54
Q108
3.22
Q208
3.07
Q308
2.89

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, and measures 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. A few respondents were still quite positive in their observations—for some markets. 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."

"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.

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