Venture Capital Confidence

Reading into the Venture Capitalist 'Confidence Index'

As Sarah Lacy of Techcrunch.com recently wrote, venture capitalists often talk about downturns being the right time to invest in startups. Yet the data does not reflect this belief. An interesting study was conducted by University of San Francisco associate professor of entrepreneurship Mark Cannice. He asked local venture capitalists how confident they were in the high growth industry in the next 6-18 months. This "confidence index" shows an upturn and downturn by quarter. For example, in the last quarter of 2007, when the VC industry was booming, the confidence index took a dive. Similarly, when the markets were still struggling in the start of 2009, VC confidence was soaring. So, it appears venture capitalists really can predict economic cycles. (You can find the USF Confidence Index data here).

Now, venture capitalists' confidence is the same in this quarter as it was in the second quarter of 2009. This could mean that VC's are hesitant to decide whether the current recovery is real or just the calm before another storm. The IPO market seems to be reviving but until venture capitalists see solid evidence of this recovery, they won't get their hopes too high.

Here's more from Sarah Lacy on this confidence index and the VC industry:

So what does that mean? In short, they're still confident, but waiting for that confidence to be backed up by reality.

Here's the good: VCs still feel there's a lot of good new companies out there, and they know that to make returns ten years from now, they have to keep the dollars flowing now, according to the survey. What's more: There are more private tech companies with more than $50 million in annual revenues that haven't yet exited than ever before. It's a combo of some dot com survivors whose markets finally caught up with their original hype and some surging newer companies. Both are either having a hard time going public in stock market that ignores mid-cap companies or are run by CEOs that just don't want to go public in a short-term, Sarbanes Oxley world.

Here?s the bad: VCs essentially have two 'customers' and both are cautious buyers of what VCs are selling right now. One are the LPs, who despite the recovering public markets are way over-allocated in illiquid venture capital funds and, whether they believe in the asset class long term or not, they're being forced to sell stakes or at a minimum curtail investing in the next cycle of funds. Read more here.

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