The Silicon Valley Venture Capital Confidence Index rose in the first quarter for seventh consecutive quarter. This marks the longest upward trend in the history of the index, according to Mark Cannice at the University of San Francisco, who assembles it. The index now stands at 4.03 on a 5 point scale with 5 indicating high confidence. VCs interviewed for the index cited the IPO market and the rapid technological disruption being driven by startups for their confidence.
Silicon Valley Venture Capitalist Confidence Index® (Bloomberg ticker symbol: SVVCCI)
First Quarter – 2014 (Release date: April 29, 2014)
Mark V. Cannice, Ph.D. University of San Francisco
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 high- growth 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 2014, based on a March 2014 survey of 31 San Francisco Bay Area venture capitalists, registered 4.03 on a 5 point scale (with 5 indicating high confidence and 1 indicating low confidence). This quarter’s index measurement increased from the previous quarter’s confidence reading of 3.94. Please see Graph 1 for trend data.
Venture capitalists’ confidence rose again in the first quarter of 2014 as a strong exit environment supported the VC business model. With the Q1 index reading, confidence among Silicon Valley venture capitalists has increased for seven consecutive quarters, the longest upward trend in the history of the Index and the highest measurement of confidence since Q3 2007. The continuing strong IPO market for venture-backed firms clearly buoyed VC confidence. In fact, Thomson Reuters and the National Venture Capital Association reported that the number of venture-backed IPOs in Q1 2014 was the highest since Q3 2000.2 Additionally, a consensus appears to exist among the VC survey respondents this quarter that the welcoming exit market has been earned through the disruptive innovations being developed and deployed by many of the portfolio companies backed by venture capital firms.
Some caution remained though as to the durability of the welcoming exit market, and it seemed that there was some thought as to how quickly firms might achieve a liquidity event before the current window closes. Still, the fundamentals of disruptive innovations being crafted by diligent entrepreneurs and guided by seasoned venture capitalists for growing markets suggests that there is a “there” there this time. 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 robust IPO market for venture-backed companies is driving confidence higher. Igor Sill of Geneva Venture Management explained “I am seeing the return of a strong IPO market for venture backed tech with a pipeline which includes the likes of Alibaba, Box, Dropbox, Coupons.com, Good Technology, Lending Club, Opower, Palantir Tech, Seamless, Square, Spotify, Threatmetrix and Zoosk. This strong IPO market will set the stage for increased M&A activity and a more aggressive venture funding of series A start-ups in the months ahead. Fireye’s successful IPO followed immediately by its $1 billion acquisition of Mandiant is an excellent case in point. Annual spending on fighting cyber- theft alone now tops $100 billion. I sense the hyper-growth segment trends are cloud computing, cybersecurity, e-payments and mobile security plays. I do have concerns over some consumer-oriented Internet valuations. Another innovative disruption trend I see is the new, full stack approach disrupting legacy software players. Just like SaaS (think Salesforce.com) disrupted the old software licensing model. The full stack approach is designed to maximize control of the entire customer experience while maximizing the economic monetization aspect.”
Providing another IPO case in point, Thomas McKinley of Cardinal Partners shared that the “Castlight IPO has positively impacted the healthcare IT sector.” Furthermore, Jon Soberg of Blumberg Capital suggested “The exit markets look very good in the near term, and there is plenty of fresh venture capital to support companies as they grow toward exit. We continue to see extremely high quality companies being built, generating very good opportunities.” Affirming this positive trend, Sandy Miller of Institutional Venture Partners indicated “While we are seeing a few breathtakingly high private valuations on highly visible technology companies, the overall environment for venture capital remains relatively balanced. I think it will be a strong year for exits from venture portfolios on both the IPO and M&A fronts.”
Voicing some caution on the exit environment, Debra Beresini of inventor stated, “While the IPO market is healthier and venture funds have increased their investments into companies, it has been a long 14 years. Since the dot-com bubble, the venture capital investment market has been erratic. Beginning in 2013 the VC market began stabilizing and growing, and the market continues to do so in early 2014. These are encouraging signs and boost confidence, but it is a slippery slope.”
Central to the attractiveness of venture-backed firms in the public exchanges are the disruptive nature of the innovations3 they are bringing to the market. Jeb Miller of Jafco Ventures attributed his confidence to “massive market disruption with the rise of cloud, mobile and big data platforms and the increasingly vulnerable position of legacy incumbents.” Mr. Miller continued, highlighting the “vibrant market for IPOs and strategic exit alternatives and an abundance of capital available for promising Bay Area startups.” Similarly, Jeff Clavier of SoftTech VC contended “The market is full of great teams of entrepreneurs building innovative, disruptive products and solutions in a number of B2B verticals, healthcare, education, agriculture…The potential of these companies is remarkable if they can prove themselves and raise the financing they need to reach scale.” Additionally, John Malloy of BlueRun Ventures affirmed “The Valley is leading the world in Data Driven Mobile Innovation.”
Finally, Mark Platshon of Birchmere Ventures detailed “I’ve never seen such a broad array of sectors all being disrupted in meaningful ways at the same time. TV and media are being disrupted by online video. Bitcoin will change money and commerce and spawn hundreds of companies. New curriculum standards, new technologies, new classroom models (flipped classroom) and the entry of big players like Apple and Amazon competing for students and schools are disrupting (and hopefully improving) education. Artificial intelligence is filtering into everything. 3D printing is enabling faster prototyping and mass customization. Electric vehicles and battery improvements are disrupting the traditional automotive sector. Apple and Google are finally jumping into the automobile infotainment business and this will create a whole new open platform for entrepreneurs. Wind and solar are now cost reduced enough to allow renewable electricity to be competitive with natural gas turbines without government incentives. All this and we haven’t even started talking about how the life sciences and healthcare are undergoing disruption and progress. And corporates have money for acquisitions, and the IPO market is HOT. It’s a great time to make investments and an even better time to take some profits. We’re quickly limited by the availability of engineers.”
Another venture capitalist respondent who requested anonymity observed “public markets driving the high velocity of VC money flow and earlier ideas/companies getting money more easily.” The same respondent noted the “fundraising environment for VC firms to raise new funds is improving.” Confirming this notion, Thomson Reuters and the NVCA reported Q1 2014 as the strongest quarter for venture capital fundraising since Q4 2007.4
The disruptive innovations being created appear to be grounded in sustainable enterprises. For example, Mohanjit Jolly of DFJ reported observing “Real companies bringing content with real business models.” Bill Reichert of Garage Technology Ventures maintained “The rebalancing of investments from consumer apps over to enterprise and infrastructure, along with the recent successes in life sciences and medical, feels more sustainable than the bubbly imbalance of a couple of years ago. Meanwhile, the recycling of success money and the broadening of funding sources seems to be lifting all boats. The question is, how resilient will the system be to the next shock?” Furthermore, Dan Lankford of Wavepoint Ventures confirmed “seeing lots of interesting deal flow.”
Some venture respondents offered a more cautious assessment. One respondent attributed “high valuations and too much money in the market” for a modest confidence rating. Another respondent warned “continued uncertainty around the healthcare environment in the USA.” And DAg Syrrist of Vision Capital summed, “Ironically, I believe we’re going to be entering a period where substantive metrics in the economy will continue to be directionally positive, and the venture industry will significantly adjust valuations and limit the willful disregard for rational metrics in evaluating new business, especially in the social media space. It feels an awful lot like the accelerating climb close to the summit. That said, I’m equally sure it will go on for a while, and then retract. A couple of IPOs off the track or a full-blown financial market impact from the crisis in the Crimea could just do the trick.” On a similar note, Kurt Keilhacker of Techfund Capital stated “Firms are anxious to create liquidity events for their investors as they are mindful that IPO and acquisition windows often abruptly change.”
In summary, Silicon Venture capitalists’ confidence continued to rise in the future high-growth entrepreneurial environment in the San Francisco Bay Area. The increase in Q1 confidence made for seven consecutive quarters of increasing sentiment, the longest upward trend in the history of the Index and the highest level since Q3 2007. A robust IPO market for venture-backed firms is clearly driving confidence higher as it is central to the venture capital business model and is attracting capital to the asset class. Following the positive momentum in exits and fundraising, increases in venture investment5 are supporting multiple layers of disruptive innovations that have the potential to transform or create industries. However, the duration of the munificent exit environment that is sparking this virtuous circle of growth will more likely be a function of macro economic and political stability than the viability of the portfolio firms being developed in the Valley. For example, much less concern over macro environmental issues was offered in this survey than in recent surveys. As hoped, the stabilizing effect of a more predictable macro environment is providing a context where the strength of market fundamentals and the innovative process drive confidence higher, and with it, more investment in the next wave of disruptive businesses. Barring an unexpected shock from public policy or international politics, the natural forces of entrepreneurship and innovation in the supportive Silicon Valley ecosystem should continue to support new venture formation, new transformative innovations, and broad economic growth.