Download Q1 Silicon Valley Venture Capitalists Confidence Report

Silicon Valley Venture Capitalist Confidence Index®
(Bloomberg ticker symbol: SVVCCI)
First Quarter – 2016
(Release date: June 2, 2016)
Mark V. Cannice, Ph.D.
University of San Francisco School of Management
The Silicon Valley Venture Capitalist Confidence Index® (Bloomberg ticker symbol: SVVCCI) is based
on a recurring quarterly survey of San Francisco Bay Area/Silicon Valley venture capitalists. The Index
measures and reports the opinions of professional venture capitalists on their estimations of the highgrowth venture entrepreneurial environment in the San Francisco Bay Area over the next 6 - 18 months.1
The Silicon Valley Venture Capitalist Confidence Index® for the first quarter of 2016, based on a March
2016 survey of 28 San Francisco Bay Area venture capitalists, registered 3.54 on a 5 point scale (with 5
indicating high confidence and 1 indicating low confidence). This quarter’s index measurement was little
changed from the previous quarter’s index reading of 3.59, indicating some stability in overall
confidence. Please see Graph 1 for trend data.
Graph 1
Trend line of Venture Capitalists' Confidence over the last 49 quarters Confidence Index
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Questions about this ongoing research study or related topics should be sent to Professor Mark Cannice at [email protected].
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Confidence in the future high-growth entrepreneurial environment among venture capitalists in
Silicon Valley decreased only slightly in the first quarter of 2016 from the final quarter of 2015 as
VCs took the declining valuations of some later stage enterprises in stride while focusing on the
opportunities in earlier stage ventures in a number of technology sectors. This broad view of
opportunities in an otherwise volatile valuation environment bodes well for the stability of the longerterm entrepreneurial landscape. Similar to the VC confidence trend over the last two quarters, total
venture capital investment dollars varied little in Q1 from the previous quarter, but they were down about
11% from the year-earlier quarter.2 However, fundraising, in terms of dollars committed to VC funds,
soared in Q1 from the previous and year-earlier quarters,3 even while the IPO market for venture-backed
firms was very weak in Q1 as compared to the previous and year-earlier quarters4. This imbalance in
capital flows between fundraising, investments, and exits suggests a diversion of expectations and creates
a tension in the venture business model that cannot be sustained indefinitely.
In the midst of ongoing changes in the high-growth entrepreneurial environment, the Silicon Valley
Venture Capitalist Confidence Index stayed relatively constant in Q1 and below the 12-year average, but
suggests a reasonably steady transition from headier days of unsustainable trends in valuations to a clearer
focus on traditional new venture value creation methods. In the following, I provide many of the
comments of the participating venture capitalist respondents 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.
A focus on opportunities brought about by technology changes was apparent in Q1. For example,
Jeb Miller of Icon Ventures contended “The massive opportunity to solve vertical market and business
use cases leveraging the power of the new cloud, mobile, and big data platforms remains. We are seeing
a return to capital efficient models and a pullback from the ‘grow at all cost’ strategy that has plagued the
market for the past couple years. This will lead to better alignment of interest and better exit
opportunities for entrepreneurs and their investors.” Eric Buatois of Benhamou Global Ventures reasoned
“The continuous digital transformation of the enterprise creates strong opportunities for B to enterprise
software companies to deliver new forms of customer interactions, new employee productivity solutions,
and defend the enterprise against cyber security attacks.” In fact, Bob Bozeman of Eastlake Ventures
judged the current entrepreneurial environment as the “best conditions I’ve ever seen.”
In the life science arena, Tom McKinley of Cardinal Venture Partners reported “seeing much more
activity in healthcare start-ups (non-biotech).” He continued, saying “I see a slowdown in biotech
funding, given the dramatic drop in the stock market. However, healthcare IT and health consumerrelated activity are much stronger – double activity of last year.”
The valuation adjustments taking hold also pointed to better venture metrics. Sandy Miller of
Institutional Venture Partners emphasized “What a difference a quarter makes. We have had a
fundamental reset of valuations in the private market. We are back to a healthier, more normalized
environment. Great companies will still get financed at attractive prices. But the euphoria that gave even
strong companies unsustainable valuations and rewarded ‘me too’ companies with high valuations is
thankfully gone. I think 2016 will be a great year for venture capital investing.” Kurt Keilhacker of
Elementum Ventures also noted that "Valuation expectations are being moderated because startups are
being mugged by reality. Yet this is a season of remarkable emerging technologies and equally impressive
founders. Saner valuations are good for everyone."
Furthermore, Gerard van Hamel Platerink of
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NVCA press release dated April 15, 2016 (based on MoneyTree™ Report from PWC and NVCA, Data: Thomson
Reuters).
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NVCA and Thomson Reuters press release dated April 11, 2016.
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NVCA and Thomson Reuters press release dated April 4, 2016.
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Redmile Group indicated “Pricing in the venture market is being slowly recalibrated to levels where
investors can be more confident of earning returns commensurate with the risk they are taking. However,
this process will likely take a number of quarters as some companies will be able to delay the pain of a
down-round with bridges or other creative financing structures.”
Innovation persists in the midst of changing financial model dynamics. Bob Ackerman of Allegis
Capital contended “While innovation is a constant in Silicon Valley, venture financing runs in
cycles. The inevitable cooling of the ‘Unicorn’ investment cycle is trickling down through all the strata
of the startup ecosystem. We have gone from a ‘sellers’ to a ‘buyers’ market.” Another venture capitalist
respondent mentioned “I think that while the innovation engine will continue to hum, the notion of capital
efficiency and valuation normalization will take hold over the next 12-18 months.” And John Malloy of
BlueRun Ventures reminded “Challenging funding cycles in Silicon Valley tend to produce the strongest
startups.”
Focusing on exit markets, Paul Holland of Foundation Capital sensed “The chill from public markets
slowed later stage activity, but the thaw is helping with the psychology of investing such that I think we
are currently in an equilibrium state between greed and fear.” And Dixon Doll, Emeritus Co-founder of
DCM, stated “It’s more likely to see excellent end game results for well-managed top-notch
entrepreneurial companies when the overall financial environment is solid. I predict the current chilly exit
environment is an overreaction on the downside which will moderate positively without excess.”
Some venture capitalist respondents were less sanguine. Dan Lankford of Wavepoint Ventures
indicated “The climate seems to be somewhat more cautious.” And Jon Soberg of Expansive Ventures
added “I think the market shifted in the summer of last year and that it will be tougher for the next 6-12
months.” One venture capitalist respondent, who commented confidentially, noted the “demise of the
unicorns” for low confidence, and another pointed to “some weakening of the economy” for low
confidence. And still another VC respondent observed that “Echo risk is increasing as cash positions of
many Bay Area startups are weakening, and many of them count on OTHER Bay Area start-ups for
revenues.”
Highlighting differences among venture maturities, Venky Ganesan of Menlo Ventures concluded
“It’s the tale of two cities. Late stage investments have been hit due to a combination of high valuations,
nontraditional investors (hedge funds, mutual funds) leaving, and the threat of raising interest rates. Early
stage venture remains a highly attractive area for investment since the trends driving disruption – mobile,
cloud, big data, social – all remain intact. 2016 is going to be a very good time to start and build early
stage companies. However if you are a late stage company that is gross margin negative and burning
cash, winter is coming.” Taking a similar stance, Igor Sill of Geneva Venture Management wrote “I
contend that new capital is entering the venture ecosystem with corporate development arms now
investing in venture funds as well as co-investing directly alongside venture firms in relevant
technologies, augmenting and accelerating their R&D efforts. Many Chinese investors seeking stability
are also attracted by higher yield venture investments. So, there will be ample new investment dollars,
though I contend that many existing, older venture funded investments will experience flat or down
rounds along with difficulty in raising new capital. Essentially, a washing out of older venture-backed
companies in favor of newer generation startups.”
Change may be afoot. Dag Syrrist of Vision Capital predicted “I expect a robust reduction in available
capital for me-too companies, especially those focusing on how to get a sandwich delivered and other
highly essential services aimed at 23-year-olds as the consequence of later stage / high valuation deals
dwindling. The paradox is that the plunging cost of starting companies coupled with widely available and
accessible global engineering talent at a fraction of Silicon Valley costs, should usher in a golden age for
companies aiming at historically sacred cows (HR, financial services, asset mgmt. etc.), but I fear we’re
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reactive and the fear of missing out is being overtaken by the fear of losing money. That said, corporate
venture capital with a dependable 3 year lag, could soften the drop.”
More broadly, Bill Reichert of Garage Technology Ventures reflected “It is becoming increasingly clear
that the imbalances in the ecosystem are not sustainable. The proliferation of incubators, accelerators, coworking spaces and funding groups has generated an ocean of startups that cannot be sustained. And the
tide of capital that flowed in from non-venture sources will ebb with the downturn in valuations at the
unicorn level. There are lots of brilliant companies getting lost in all this drama. I just hope the
disciplined investors and entrepreneurs can find each other and keep their heads while most everyone else
is losing theirs.”
In sum, confidence in the future entrepreneurial environment remained relatively constant among
the responding venture capitalists in Q1. However, a wide range of points of view connotes some
unpredictability in the entrepreneurial environment. Still, innovation is persisting and perhaps even
thriving during these dynamic shifts in valuations and potential exit paths.
While richly valued enterprises may find leaner times ahead, new disruptive ventures may be entering an
opportunity rich environment with venture partners ready to get to work with them. However, the
asymmetry in capital flows (e.g. fundraising, investments, and exits), cannot continue indefinitely, and it
will be the manner of their adjustment that, in part, determines the medium to longer-term health of the
high-growth entrepreneurial environment. Venture industry financial metrics and broader macro issues
(e.g. likely near-term U.S. interest rate hikes, election year politics, questions on China’s growth and
financial markets, EU stability) notwithstanding, the Silicon Valley innovation engine continues to run
well.
Table 1
Participating Venture Capitalists in the 2016 1tst Quarter Confidence Index Survey
Participant
Bill Reichert
Bob Bozeman
Dag Syrrist
Dan Lankford
Deepak Kamra
Dixon Doll
Eric Buatois
Gerard van Hamel Platerink
Igor M. Sill
Jeb Miller
Jeremy Liew
John Malloy
Jon Soberg
Kurt Keilhacker
Pat Kenealy
Paul Holland
Robert R. Ackerman, Jr.
Sandy Miller
Shomit Ghose
Company
Garage Technology Ventures
Eastlake Ventures
Vision Capital
Wavepoint Ventures
Canaan Partners
DCM Founder Emeritus
Benhamou Global Ventures
Redmile Group
Geneva Venture Management
Icon Ventures
Lightspeed Venture Partners
BlueRun Ventures
Expansive Ventures
Elementum Ventures
IDG Ventures
Foundation Capital
Allegis Capital
Institutional Venture Partners
Onset Ventures
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Standish O’Grady
Stephen J. Harrick
Tom McKinley
Venky Ganesan
Anonymous
Anonymous
Anonymous
Anonymous
Anonymous
Granite Ventures
Institutional Venture Partners
Cardinal Partners
Menlo Ventures
Anonymous
Anonymous
Anonymous
Anonymous
Anonymous
Mark V. Cannice, Ph.D. is Department Chair and 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 James 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 registered trademark of Mark V. Cannice.
Copyright © 2004 – 2016: Mark V. Cannice, Ph.D. All rights reserved.
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