Wednesday, October 15, 2008

Silicon Valley Venture Capitalists’ Confidence Declines to New Low

The Silicon Valley Venture Capitalist Confidence Index™ for the third quarter of 2008 registered 2.89 on a 5 point scale, falling from the previous quarter’s reading of 3.07 to a fourth consecutive new low in the nearly five year history of the Index. The 2.89 reading indicates a continuing downtrend in venture capitalists’ confidence in the future high-growth entrepreneurial environment in the Bay Area. Authored by Professor Mark Cannice of the University of San Francisco (USF) School of Business and Management, this quarterly VC Index (Bloomberg ticker symbol: USFSVVCI) reading is based on a September 2008 survey of 33 Silicon Valley venture capitalists.

“The unprecedented deterioration of macro economic conditions and the resulting impact on the venture capital business model drove confidence lower,” said Dr. Cannice. For example, Dag Syrrist of Vision Capital explained, “Venture funds are frozen with uncertainty.” Bart Schachter of Blueprint Ventures argued “…Economic developments will eventually reach into all asset classes including venture.” Igor Sill of Geneva Venture Partners noted “…follow-on portfolio investments will be very tight and few, with numerous shutdowns of poor performing investments.” Separately, David Epstein of Crosslink Capital was concerned that shrinking limited partner stock portfolios would eventually mean lower commitments to venture funds.

In a related study forthcoming in the Journal of Small Business and Entrepreneurship, Cannice and co-author Cathy Goldberg, associate professor of finance at USF, found that changes in VC confidence tended to precede changes in the dollar amount of venture-backed IPOs. Therefore, declining confidence in Q3 portends a continuing difficult exit environment. This finding is consistent with a number of VC respondents in the current survey. TC Wang of Acorn Campus noted, “The current financial market mess will essentially block the IPO and most of the M&A deals for quite a while.”

However, some venture capitalists respondents in the 3Q Index Report looked to the lessons of the past for their optimism. Chris Rust of US Venture Partners and Robert Ackerman of Allegis Capital suggested that market downturns may be the best time to start new businesses.

Cannice concluded that the increasing strain on the venture capital business model – fewer exits and declining capital commitments - suggest fewer investments and lower valuations in the near term. The VC Index Report is available at

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