SAN FRANCISCO — Venture capitalists’ confidence that the current tech boom will stick around is waning, according to a survey of Silicon Valley investors released Tuesday.
Confidence in the venture and entrepreneurial markets during the second quarter this year hit the lowest point in two years, according to the quarterly Silicon Valley Venture Capitalist Confidence Index, a survey of 28 VCs in the valley. VCs reported a confidence level of 3.73 on a 5-point scale, declining from 3.81 in the first quarter. The survey asks VCs to rate their confidence in the high-growth venture investing market over the next six to 18 months.
Although a small sample size, the survey is a fixture in the valley’s VC community. Conducted by Mark Cannice, department chair and professor of entrepreneurship and innovation at the University of San Francisco School of Management, the survey is in its 11th year and includes feedback from well-known valley VCs such as Tim Draper of DFJ, Venky Ganesan of Menlo Ventures and Shomit Ghose of Onset Ventures.
The waning confidence was attributed to increasing concern about the high valuations of startups, a surge of investing from hedge funds and big institutional investors that is driving up funding rounds, rising cost of doing business in Silicon Valley and potential fallout of global economic issues such as the Greek debt crisis and falling stock market in China.
“The unprecedented fundraising and valuations associated with so-called ‘unicorns’ … gives reason for substantial pause,” said Bob Ackerman, founder and managing director of Allegis Capital. “Expectations are beginning to outpace reality.”
But none offered a dire forecast such as a repeat of the dot-com bust, and many VCs expect mergers and acquisitions and initial public offerings to continue at a rapid pace — meaning valuations won’t go down immediately.
“I expect a correction in the near term, especially when the Fed raises interest rates, but the long-term picture remains very strong,” Ganesan said. “It’s not software but rather Silicon Valley that is eating the world.”
Any anxiety certainly didn’t hinder investing during the second quarter, when venture firms posted the highest quarterly investment since 2000. VCs put an astonishing $9.1 billion into Silicon Valley companies, a record that has been beaten only once.
“As VC confidence tends to be forward-looking, this disparity is not unusual,” Cannice wrote in the report.
However, reports of VCs funding startups not because they think the companies will last but because they must quickly spend the money they have raised — so they can then raise more while it’s still available — and increasing anxiety over some VCs divesting their investments suggest that trouble could be on the horizon.
Contact Heather Somerville at 510-208-6413. Follow her at Twitter.com/heathersomervil.
