VCs: We Are Less Confident

Venture capitalists, characteristically an optimistic bunch, have grown more pessimistic about their industry over the past quarter, weighed upon by worries about rapidly inflating Internet startup valuations, political gridlock, and greater regulatory burdens for the healthcare sector.

Those were the concerns cited by VCs surveyed for the Silicon Valley Venture Capitalist Confidence Index, a quarterly barometer of industry sentiment compiled by Mark Cannice, a professor of entrepreneurship at the University of San Francisco.

For the second quarter, the confidence index dipped to 3.66 on a 5-point scale (with 5 being the highest). That’s down from 3.91 in the first quarter from respondents, who are asked to predict the entrepreneurial climate for the next 6 to 18 months. Despite the dip, however, Cannice says, numbers still show a marked improvement over two years ago, when the financial crisis and a stalled IPO market dealt a more serious blow to VC confidence.

“The entrepreneurial environment itself is still generally in a positive trend, but there are some background issue that are having a negative effect on confidence, at least in the short term,” Cannice says. In particular, VCs are concerned about how the macroeconomic environment – and more specifically the federal government’s ability to manage its debt – will impact liquidity and growth prospects.

For the most part, VCS remain optimistic. They’re just not as optimistic. Or, as Bob Pavey of Morgenthaler Ventures put it: “We are still in the early stages of an upturn…but there will continue to be many downs as well as ups. And some of the downs will be painful.”

At the same time, VCs continued to raise concerns about valuations in hot sectors such as group buying and social networking. One venture capitalist respondent mused that “2011 will be remembered as the year that everyone went nuts and overpaid — $1B is the new $100M valuation. For most, this will end in tears.” Another VC respondent echoed this prediction, indicating that his sentiment was “high in areas like tech/consumer in the next 6-12 months, until the bubble bursts.”

Cannice, for his part, stops short of calling it a bubble, citing the phenomenally rapid growth and revenue generation of many companies raising rounds at comparatively high valuations.

“Some of the social media firms are priced highly, but they have very real revenues and business models that are working,” he says. “The only question is whether people are paying too much.”

Link to full report here.