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Valley VCs: Why So Glum?

Ok, granted venture returns have been negative overall for the past decade. And sure, the crummy broader economy, painfully high unemployment rates, and improving-but-still-slow IPO market don’t make present conditions particularly inspiring.

But it that any reason to be down on the venture capital business?

Apparently it is. According to the Silicon Valley Venture Capitalist Confidence Index, confidence levels among regional VCs fell markedly in the second quarter.  Overall, confidence levels registered at 3.28 on a 5-point scale, down from the previous quarter’s reading of 3.65.

The dip marks a reversal of a modest upward trend in confidence over the previous five quarters, says the survey’s author, Mark Cannice, an entrepreneurship professor at the University of San Francisco. The index is based on a survey of 32 Silicon Valley VCs who are asked to give their estimation of the environment for high-growth, venture-scale entrepreneurial companies over the next six to 18 months.

The drop in confidence appears to be primarily linked to concerns over macroeconomic trends in the U.S. and internationally and to regulatory uncertainty specific to the venture industry, Cannice says. Notably, it occurred despite a strengthening IPO market for venture-backed firms in Q2, with some respondents pointing to the lack of clarity for future exit opportunities.

One respondent, who asked to remain anonymous, attributed some of the pessimism to the expectations that: “structural shifts in the venture business will constrain the availability of capital at a time when funds need cash” and that “several firms will collapse in the next 18 months.” Another respondent pointed to Congress’ proposed carried interest tax changes, describing them as “a disaster for the U.S. venture capital industry and for U.S. innovation and economic growth.”