Silicon Valley Venture Capitalist Confidence Index

(Bloomberg ticker symbol: SVVCCI) First Quarter 2012

(Release date: April 26, 2012)

Mark V. Cannice, Ph.D. University of San Francisco The quarterly Silicon Valley Venture Capitalist Confidence Index (Bloomberg ticker symbol: SVVCCI) is based on an on-going survey of San Francisco Bay Area/Silicon Valley venture capitalists. The Index measures and reports the opinions of professional venture capitalists in their estimation 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 2012, based on a March 2012 survey of 34 San Francisco Bay Area venture capitalists, registered 3.79 on a 5 point scale (with 5 indicating high confidence and 1 indicating low confidence.) This quarters index rose significantly from the previous quarters reading of 3.27 and marks a major inflection point upward in sentiment from the previous three quarters. Please see Graph 1 for trend data.
Graph 1

Trend line of Venture Capitalists' Condence

over the last 33 quarters

5 Confidence Index 4.5 4

3.5 3

2.5

Time

Publishing a recurring confidence index of professional venture capital investors is intended to provide an on-going leading indicator of the overall health of the high-growth new venture environment. Questions about this study or related topics should be addressed to its author at Cannice@usfca.edu.

The Silicon Valley Venture Capitalist Confidence Index is sponsored in part by:

Venture capitalists confidence in the future high-growth venture environment in the San Francisco Bay Area rose sharply in the first quarter of 2012. This increase in confidence countered the downward trend over the last three quarters of 2011. The venture capitalists that responded to the Q1 survey pointed to a more welcoming public financial market that is providing more liquidity opportunities for their portfolio firms, along with technology convergence in mobility, cloud, and social platforms which is fostering the development of a wide range of entrepreneurial endeavors. While concern remains over the fragility of the macro economy and the impact of regulatory hurdles, confidence in the determination and creativity of entrepreneurs at building innovative enterprises upon rising technology platforms supported a broad increase in positive sentiment. 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 wished to remain anonymous. Improving public financial markets have enhanced liquidity opportunities for venture backed firms, supporting an increase in VC confidence. Bob Pavey of Morgenthaler Ventures indicated When the OTC market is strong we start looking smarter and things get more positiveits no more complicated than that. Dag Syrrist of Vision Capital explained Capital markets are showing sustained momentum; nothing beats the prospect of liquidity, and there's an overwhelming sense of optimism which is what's in fact needed and should be self-fulfilling. That said, the sustained low interest rate environment is the more important driver which will eventually force the mountain of cash sitting on the side lines into equities, real-estate and, God forbid, alternatives Furthermore, Sandy Miller of Institutional Venture Partners noted The IPO market has improved for venture-backed technology companies. This tends to be a leading indicator of an overall better exit environment. Good exits in turn create the excitement that fuels both entrepreneurial zeal and the willingness of LPs to commit to the venture capital asset class. Igor Sill of Geneva Venture Management asserted that It appears that our economy is finally showing signs of a solid recovery with a revitalized, pent-up initial public offering (IPO) market, registering healthy returns for venture investors. IPOs are the major liquidity realization in this asset class. I see existing venture capital funds being deployed, new funds being raised and investor allocations to venture capital on the increase. Venture backed companies continue to deliver positive returns at a better rate than public market indexes such as NASDAQ or S&P. Venture capital has historically experienced a constantly changing cycle of emerging start-ups, new funds, angel investors and innovative technologies tied to capital markets. When capital markets recover the venture capital segment excels. And A VC survey respondent who requested anonymity shared that A lot of the large recent/pending exits in the social media/technology arena are generating renewed enthusiasm in early stage investing. In fact, Thomson Reuters and the National Venture Capital Association reported that Q1 2012 was the best first quarter in five years for venture-backed IPOs.2 Deal flow remains strong and deals are getting done. Roy Thiele-Sardina of HighBar Partners stated We are seeing more deals that are maturing with real product and customers. The entrepreneurs are getting higher penetrations and they understand what VCs are looking for. Jeb Miller of Jafco Ventures observed that Market power has shifted to the entrepreneurs with multiple firms competing to get into the best projects. The exit market is slowly improving and will snowball as more companies come public and create a new wave of aggressive mid-market buyers. Recruiting remains a challenge and the high cost of living and building teams poses some risk to continuing to scale companies in the Valley. Bob Bozeman of Eastlake Ventures pointed to Improvements in deals done, an (unfortunate) rise in valuations, and stock market rise (including IPOs out and lined-up). Bill Reichert of Garage Technology
2

Thomson Reuters and NVCA Press Release, April 2, 2012.

Ventures added Things are getting a little more sensible, although at a lower level, while Dan Lankford of Wavepoint Ventures hopes to see an increase in exits this year. Finally, Bryant Tong of Nth Power offered that The bad news is that we have been through quite a lot of rough waters over the last three years. The good news is that we are seeing a resurgence of interest in early stage investments that are focused on a developed market and are capital efficient. While the sentiment toward future venture financings is increasing, the number of cases of investment and overall capital invested was down in Q1 2012 year over year and sequentially.3 The rate of innovation appears to be accelerating in Silicon Valley as connections to technical hubs around the world grow. Bob Ackerman of Allegis Capital contended The innovation throttle in Silicon Valley is running full open. There is tremendous creative development underway in Mobile, Cloud Computing, Social Media and Security - all at the same time. In the future, we will look back on this period of time as one of the Golden Ages of Innovation. All of this is in spite of large areas of public policy. And Jeb Miller of Jafco Ventures added It remains a fertile market for entrepreneurs to launch new projects with ready access to capital and opportunities to capitalize on the disruptive trends in the cloud computing, mobile Internet and social media sectors. John Malloy of BlueRun Ventures indicated that Silicon Valley is the current center for mobile innovation which is driving online and offline convergence worldwide. Eric Buatois of Sofinnova Ventures extended this view, stating We see innovations across different sectors and great entrepreneurs from different regions and countries innovating and coming to Silicon Valley to create business hubs or headquarters. The corridor between Silicon Valley and Russia is developing very nicely. The first explosion of innovation and cross border activities occurred 12 years ago between Silicon Valley and India and China. A similar effect is starting to take place with Russia. This acceleration in innovation and opportunities is based on technology platforms developed in recent years and brought to life with entrepreneurial diligence. Chris Hollenbeck of Granite Ventures shared that the Period after the bust was dead but in the mid to second half of the last decade new disruptive changes/foundations were laid down: social fabric, iPhone and other next gen mobility devices; cloud infrastructure provides a great platform for new, capital efficient software investments. A VC respondent who requested to remain anonymous observed Very high quality entrepreneurs pursuing innovative new and disruptive business models. A slowly improving economic climate is providing a positive backdrop for firmer financial markets and a growing market for products spawned from increased innovation. Brian Panoff of Granite Ventures reasoned The broader economy is slowly strengthening (knock on wood). This bodes well for startups, given the technology investments required for growth and productivity gains. With the venture industrys trend of consolidation, there may also be consolidation among startups to fewer higher quality (ones). In the medium-to-long run, this will lay a foundation for stronger business growth, as recently (and anecdotally), it seems like everybody wants to be a founder and nobody wants to be an engineer. Still, some concerns on regulatory policy, macro economic conditions, and the availability of capital were raised. One venture capitalist respondent who provided comments in confidence noted Carried Interest was again under threat thanks to Romneys tax returns. Kurt Keilhacker of Techfund Capital offered While there is justified optimism in many new ventures there are a number of macro economic factors that are unsettling. Entrepreneurs need to see more clarity in the current economic direction before they breathe any relief. And Elton Sherwin of Ridgewood Capital shared that Many small funds are having trouble raising money. Many startups are having trouble raising A round. Other startups are
3

PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report, Data: Thomson Reuters

having trouble crossing the chasm. In fact, commitments to venture funds (including seed and early stage) declined in Q1.4 Furthermore, the life science sector continues to lag. Gerard van Hamel Platerink of Accuitive Medical Ventures warned that The healthcare venture market continues to struggle with exogenous drivers such as an unpredictable FDA environment and a challenging reimbursement climate as payors seek to reduce healthcare costs. And Joe Mandato of De Novo Ventures stated Med tech investing remains sluggish; regulatory headwinds remain in place. Chester Wang of Acorn Campus Ventures indicated that Internet companies IPOs surely are encouraging. But start-ups in IT and medical devices funding are questionable. Debra Guerin Beresini of invencor provided additional context, stating it seems apparent that life science investing in 2012 is continuing at a steady pace; however, these investments are also being made into later stage companies. Early- or mid-stage life science companies are being advised to fund innovation with dollars that come from places other than venture capital. Grants are available from many nonprofit companies as well as federal agencies, and a few universities have formed venture funds focused on innovation. Teaching hospitals and/or other pharma/biotech companies can also provide clinical trial assistance for low cost fees or fees plus equity for early stage biotech companies. Strategic partners are another avenue in finding funding for both early stage technology and life science companies. Strategic partners can provide in-kind services and dollars to help further the innovation process. The bottom line is that companies that have proven their model and have experienced management are being funded. Entrepreneurs, with early stage companies, need to find more creative ways to fund their companies. In sum while caution remains, an appreciation of the vibrancy of the current technological and entrepreneurial opportunity of the Valley predominates. These trends are well summed by Nina Kjellson of InterWest Partners who explained that Unprecedented shifts in society with the promulgation of mobile devices are transforming everything from commerce, social interaction, and politics to medicine and wellness. More engaged and informed consumers than ever before and the tools to collect and interpret consumer behavior at a level of detail allows for true personalization and targeting and the potential to truly serve and delight the customer. Technological advances in tech and life science are at an all-time high from media to sensors to analytics to nanoprinting to next-gen sequencing to synthetic biology to molecularly-targeted medicines. And probably the largest pools of either technology-genius young and passionate entrepreneurs or seasoned, proven founders and execs are partnering with an ever more sophisticated angel and institutional investor base to build best in class companies that leverage start-up learnings of the last two decades There is no question that there are macro challenges to contend with and adapt to, but pressure usually kills or perfects, so my general outlook is one of excitement and awe. To a point stronger public financial markets that are providing long sought after liquidity for increasing numbers of portfolio firms are priming the venture capital business model and will lead to more capital commitments from LPs and inspire more investment by venture firms. These trends coupled with a burst of innovation on standardizing platforms are establishing a virtuous circle of entrepreneurial growth and an upswing in venture capitalist confidence in the high-growth entrepreneurial environment in the San Francisco Bay Area. New growth areas beyond cloud, social, and mobile (e.g. big data analytics) may also be sparking longer-term enthusiasm in some sectors. And as the upcoming Facebook IPO unleashes a new wave of excitement and liquidity in the financial markets, the balance of 2012 appears promising.

Thomson Reuters and NVCA Press Release, April 9, 2012.

Table 1 Participating Venture Capitalists in the 2012 1st Quarter Confidence Index Survey Participant Alain Harrus Bill Reichert Bob Bozeman Bob Pavey Brian Panoff Bryant Tong Chris Hollenbeck Dag Syrrist Dan Lankford Debra Guerin Beresini Deepak Kamra Dino Vendetti Elton Sherwin Eric Buatois Gerard van Hamel Platerink Igor M. Sill Jay Watkins Jeb Miller Jeremy Liew Joe Mandato John Malloy Kurt Keilhacker Nina Kjellson Pat Kenealy Robert Ackerman Roy Thiele-Sardina Sandy Miller Shomit Ghose Steve Harrick T. Chester Wang Tom McKinley Anonymous Anonymous Anonymous Company Crosslink Capital Garage Technology Ventures Eastlake Ventures Morgenthaler Ventures Granite Ventures Nth Power Granite Ventures Vision Capital Wavepoint Ventures invencor Canaan Partners Formative Ventures Ridgewood Capital Sofinnova Ventures Accuitive Medical Ventures Geneva Venture Management De Novo Ventures Jafco Ventures Lightspeed Venture Partners De Novo Ventures BlueRun Ventures Techfund Capital InterWest Partners IDG Ventures Allegis Capital HighBar Partners Institutional Venture Partners Onset Ventures Institutional Venture Partners Acorn Campus Ventures Cardinal Partners Anonymous Anonymous Anonymous

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 the attorneys of Greenberg Traurig for their on-going support of this research, as well as to Jack Cannice for his 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 2012: Mark V. Cannice, Ph.D. All rights reserved.