Silicon Valley Venture Capitalist Confidence Index (Bloomberg ticker symbol: SVVCCI)

Transcription

1 Silicon Valley Venture Capitalist Confidence Index (Bloomberg ticker symbol: SVVCCI) Fourth Quarter 2013 (Release date: January 30, 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 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 fourth quarter of 2013, based on a December 2013 survey of 32 San Francisco Bay Area venture capitalists, registered 3.94 on a 5 point scale (with 5 indicating high confidence and 1 indicating low confidence). This quarter s index rose slightly from the previous quarter s confidence reading of Please see Graph 1 for trend data. Trend line of Venture Capitalists' Confidence 1 Questions about this ongoing research study or related topics should be sent to Professor Cannice at Cannice@usfca.edu. The Silicon Valley Venture Capitalist Confidence Index is sponsored in part by: 1

2 Confidence among venture capitalists edged higher in the final quarter of 2013 as expectations for a welcoming exit environment and growing market opportunities continued. In fact, the Q4 confidence reading made for six consecutive quarters of increasing sentiment among the responding venture capitalists to this quarterly survey and research report and is the highest measurement of confidence since Q The steady rise in confidence suggests that a stabilizing macro environment is providing a firmer foundation for positive momentum in venture investing in Specifically, venture capitalist respondents in this Q4 report pointed to growing exit opportunities in the public markets. In fact, Thomson Reuters and the NVCA reported a large increase in the dollar value of venture-backed IPOs in Q4 over the previous quarter and year-earlier quarter. 2 A queue of high-performing portfolio firms stand ready to take advantage of the rebounding liquidity environment. Furthermore, these growing exit opportunities are encouraging new venture investments and, thus, bolstering the venture capital business model and the innovation cycle that spawns from it. Still, some caution was voiced over valuations and the uncertain duration of the welcoming public markets. 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. Finally, as this report marks the 10th anniversary (40th consecutive quarterly survey and research into Silicon Valley venture capitalist confidence), a brief retrospective on the last ten years of insights and trends is provided as an addendum to this report. Momentum appears positive for venture investors and for their innovative portfolio firms. Sandy Miller of Institutional Venture Partners said Good performing tech IPOs brighten the prospects for all young tech companies, and I am optimistic that 2014 will be a strong year. There s never been a moment in history when there are so many private venture-backed technology companies with real scale and rapid growth. Tim Draper of DFJ reflected, noting Venture Capital and entrepreneurship have gone through a very difficult decade and things are finally looking up. I look forward to see the renewed optimism in our world. One reason is that companies have been working hard for a decade with very little liquidity, and suddenly there is liquidity. Additionally, Jeb Miller of Jafco Ventures indicated that the local tech market is booming, fueled by a robust IPO market, improving strategic exit environment and massive disruption caused by shift to cloud and mobile platforms. The robust exit market is, predictably, supporting the venture business model. Deepak Kamra of Canaan Partners highlighted rising exit valuations and an IPO window that is open (for now). Another venture capitalist respondent also pointed to the the re-emergence of the IPO market and the continued influx of quality business plans for entrepreneurial business creation. High potential portfolio firms at various stages of development are well poised to take advantage of this more liquid exit environment. John Malloy of BlueRun Ventures detailed The market is very positive, both for growth round valuations and exits. Companies started 2 5 years ago, that can show growth, are well positioned in the current entrepreneurial environment. Younger companies can also benefit but should also be wary of sign of valuation inflation and over investment in hot categories'. With increasing exit opportunities, capital is available for new investments. Igor Sill of Geneva Venture Management reported I sense venture confidence is heightened, with plenty of start-up capital available and flowing again. The rate of corporates falling all over themselves to acquire strategic innovation via early-stage entrants is at a record high. And, the IPO market has finally returned. I m very excited about what 2014 holds in store for venture investors. My only concern is whether there will be enough good 2 Thomson Reuters and NVCA press release dated January 2,

3 deals out there for us to put all this money to work rationally. 3 Complementing the strong exit environment, emerging sectors of opportunities appear to be providing ample destinations for available capital. For example, Jeremy Liew of Lightspeed Venture Partners suggested there are a number of interesting new themes emerging in consumer internet. And Cindy Padnos of Illuminate Ventures shared We re bullish on the potential performance of the companies we ve backed in the enterprise cloud and mobile space over the coming year. Market adoption of SaaS solutions continues to grow, demand for mobile solutions for enterprises is accelerating and investors have recognized and are rewarding the predictable performance of recurring revenue companies. And Mark Platshon of Birchmere Ventures explained I am confidently optimistic at this time because (a) we just had the best IPO year in a long time, (b) there are numerous quality companies queued up for near term IPO or M&A events, (c) newly approved crowdsourced financing and public advertising will increase the supply of early stage deals and money, (d) several big new sectors are getting exciting including i-beacons (e.g. Estimote), robotics/drones (Google acquisitions and aquihires), natural language processing and delivery, and (5) cleantech and especially solar have been top public market performers (e.g. Solar City, Fist Solar) and this bodes well for the overall cleantech and efficiency sectors. Roy Thiele-Sardina of HighBAR Partners noted We are seeing more quality investment opportunities. And Dan Lankford of Wavepoint Ventures added We are seeing an acceleration in the number of deals. In fact, PricewaterhouseCoopers and the National Venture Capital Association in the MoneyTree Report indicated an increase in the number of venture investments along with an increase in the total capital invested in Q over the previous and year-earlier quarter. 4 Positive macro fundamental trends are supporting the better exit market. Nina Kjellson of InterWest Partners attributed her confidence to strong underlying economic recovery, strong VC liquidity the last 12 months, major social dynamics (demographics of boomers and digital natives, consumer empowerment, changing social networks, mobile engagement) and technology trends (pervasiveness of mobile, big data/analytics, cloud computing and expansion of compute power and storage) driving business transformation across multiple sectors and creating new entrepreneurial opportunities. She concluded that the entrepreneurial spirit very high. And confidence in the determination and creative capability of Silicon Valley entrepreneurs continues unabated. Shomit Ghose of Onset Ventures emphasized this view, stating, Over the past year, there s been no slackening in the supply of entrepreneurs building disruptive businesses. If anything, there s been an acceleration. The metrics for life science ventures have improved as well. One VC respondent offered From the healthcare point of view, the strong biotech IPO market is attracting capital back to the biotech sector. Financing medical devices companies remains challenging, but we are seeing improvement at the FDA and increased focus by entrepreneurs of being quite capital efficient, which bodes well for future returns. All this said, capital will remain constrained in early-stage healthcare venture capital for the next few years. Lisa Suennen of Psilos Capital contended While there has been a lot of interest in healthcare IT/services, far more than historically, it is beginning to take on the characteristics of a bubble and that concerns me. The rest of healthcare (biotech/medtech) is completely out of favor. So it is a challenging time in this part of the VC landscape. 3 Thomson Reuters and NVCA reported that total capital raised by venture funds increased in Q4 over the previous and yearearlier quarter. However, total capital raised along with the number of new venture funds declined in 2013 from (Press release dated January 13, 2014.) 4 PWC/NVCA MoneyTree Report, Data: Thomson Reuters, through Q

4 However, caution was raised by some venture investors. Jon Soberg of Blumberg Capital indicated I am optimistic on the future 6-18 months, but I think we may see some slowdown in the public markets that could impact the overall environment. And Robert Ackerman of Allegis Capital stated While the level of innovation in Silicon Valley is unprecedented in its scope, there is risk of over heating in some areas, including social media and social commerce. The success of recent IPOs has also spawned an unusually high level of interest in later stage companies approaching the IPO market, potentially distorting the historic relationship between valuation and business fundamentals. This distortion portends a speed bump ahead in segments of the innovation economy. Dag Syrrist of Vision Capital summarized the opportunities and risks of the current venture environment, reporting aggregated momentum on many fronts, a budget deal out of nowhere and before 11 th hour, slower than expected rise in interest rates, strong stock market, increased M&A combined adds confidence to investors and it all just feels good for now. This rate of investing, increased valuations and giddy recollection of 99 can t last too long, but it never slows much before it stops. That said, there s a renewed confidence in technology addressing significant problems and that bodes well for the area and industry. Another venture respondent was concerned over looming tax increases. To sum, confidence continued to rise in the future high-growth entrepreneurial environment in the San Francisco Bay Area among the 32 Silicon Valley venture capitalists who responded to the Q4 survey. The uptick in Q4 confidence made for six consecutive quarters of increasing sentiment (the longest upward trend in the history of the Index and the highest level since Q3 2007, just prior to the beginning of the global financial crisis). The strength of the exit market coupled with a long queue of high potential, high growth, venture-backed firms made for a compelling case for high confidence in the resurgence of the venture capital business model and the performance of the innovative firms financed and led by venture capital investors. Still, caution remained as the continued health of the venture environment is clearly linked to the munificence of the public financial markets. The modest decrease in national political drama and uncertainty also appears to have helped stabilize the public capital markets with the resulting positive impact on the venture environment and innovation. If the political armistice holds, predictability in the business environment should continue to improve and support key aspects of the venture model (e.g. enterprise customers and potential acquirers of portfolio firms) with the resulting boost to innovation and economic growth. Barring a macro shock, 2014 appears promising for venture investing and portfolio firm growth in the Silicon Valley. 4

5 Table 1 Participating Venture Capitalists in the th Quarter Confidence Index Survey Participant Alain Harrus Bill Byun Bill Reichert Bob Pavey Cindy Padnos Dag Syrrist Dan Lankford Deepak Kamra Eric Buatois Igor M. Sill Jack Young Jeb Miller Jeremy Liew John Malloy Jon Soberg Karan Mehandru Lisa Suennen Mark Platshon Nina Kjellson Robert Ackerman Ross Jaffe Roy Thiele-Sardina Sandy Miller Shomit Ghose Standish O Grady Stephen J. Harrick Tim Draper Company Crosslink Capital 7 Capital Garage Technology Ventures Morgenthaler Ventures Illuminate Ventures Vision Capital Wavepoint Ventures Canaan Partners Sofinnova Ventures Geneva Venture Management Qualcomm Ventures Jafco Ventures Lightspeed Venture Partners BlueRun Ventures Blumberg Capital Trinity Ventures Psilos Capital Birchmere Ventures InterWest Partners Allegis Capital Versant Ventures HighBAR Partners Institutional Venture Partners Onset Ventures Granite Ventures Institutional Venture Partners DFJ Mark V. Cannice, Ph.D. is Department Chair and 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 continuing support of this research, as well as to Jack Cannice and James Cannice for their 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 : Mark V. Cannice, Ph.D. All rights reserved. 5

6 Addendum Initial reflections on 10 years of research into the confidence and insights of Silicon Valley Venture Capitalists Anniversaries provide an opportunity to celebrate and also to reflect. Looking back over the last 10 years of researching and writing these quarterly reports, I am first most grateful for the ongoing generosity of time and insight of the many Silicon Valley venture capitalists who have provided their expert commentary for many years. It is, of course, the insights of professional venture capitalists that provide the core value of this ongoing report and related research. Reflecting on the early years of this research, it seems apparent that the venture capital industry is less of a black box now than it was then. Also, it seems clear that the essential role that venture capital plays in the development of critical products and services that most of us use on a daily basis is better understood. As my own still developing knowledge and appreciation of the venture industry and its role in the national and global economy grows, I am hopeful that these recurring reports play a small part in demystifying the industry to some. And, in that role of the collector and disseminator of VC insights, I hope that some entrepreneurs and innovators have become better informed and prepared to launch their new ventures and products. On this anniversary it is important to take time to reflect on some things I have learned in this 10 year research effort and share them with those who read this retrospective. 1. Venture capitalists tend to have market prescience. Venture capitalists engage at the intersection of private and public financial markets and private and public technologies. On the technology side, they are presented and evaluate the potential of new technologies and innovation and also keep apprised of market readiness and potential public acquirers of these technologies. Thus, they tend to have a good sense of technology trends. On the financial side, VCs, of course, raise money to invest from private funds, but again interact with investment bankers and potential acquirers of their portfolio firms well before any IPO or acquisition takes place, and so have a better sense of public financial market trends. A related academic paper that examined VC confidence data alongside public market indicators suggested that VC confidence tends to precede venture-backed IPOs by a quarter in the same direction. 5 In fact, VC confidence began to plunge in Q before the public capital markets started a sharp decline in early 2008 and VC confidence bottomed out a quarter before the public financial market bottom in March Venture capitalists confidence tends to track most closely to the exit environment, with IPOs typically being the preferred method. Not surprisingly, the industry and the confidence of its participants is linked closely to the health of the public capital markets, as the ability to take venture backed firms to a successful exit is essential to the VC business model. 3. Through the peaks and troughs of the markets, venture capitalists confidence in the capability and determination of entrepreneurs stayed strong. There never appeared to be a lack of opportunity or a lack of entrepreneurial zeal to tackle these opportunities. Rather, it was the critical and less predictable other aspects of the venture business model (e.g. fund-raising, and exits) that tended to impact confidence for better or worse. 5 Cannice, Mark V., and Cathy Goldberg (2009). Venture Capitalists Confidence, Asymmetric Information, and Liquidity Events, Journal of Small Business and Entrepreneurship (Routledge) 22 (2), pp

7 4. Venture capitalists tend to be frank and use illustrative and even metaphorical language to provide layered commentary to explain their often prescient insights. Over the last 10 years of collecting over a thousand VC utterances, I have consistently been transfixed by the piercing and often colorful comments provided by venture capitalist respondents. For example, in the Q report, shortly before the global financial crisis took hold, Venky Ganesan contended that The Cinderella like credit ball is over. The clock has struck 12 and the free money liquidity party we all have been enjoying is going to result in a terrible hangover. I fear that we will have a severe recession and this will impact high-tech entrepreneurial activity in a big way. A related academic paper focused on better understanding these utterances found that VCs tend to draw from about 14 metaphorical families (Darwinism, Physics, etc.) to explain their points of view. 6 Thanks again to the many venture capitalists who generously provided their insights over the last ten years, as well as to my colleagues and research assistants for their inspiration and help, and to the attorneys of Greenberg Traurig for their ongoing support of this research. Sincerely, Mark Cannice 6 Cannice, Mark V. and Arthur Bell. (2010). Metaphors Used by Venture Capitalists: Darwinism, Architecture, and Myth, Venture Capital: An International Journal of Entrepreneurial Finance, (Routledge) 12 (1), pp