Consumer confidence has been a closely watched signal of future economic activity for years, and for good reason. Confident consumers are more likely to spend money and boost the economy. Given the impact that high-growth technology ventures have upon our national economy and international competitive edge, and the role that venture capitalists have in financing these firms, VC confidence is another important metric to monitor.
The graph below indicates the trend in VC confidence over the last 16 quarters (5 = high, 1 = low, full results and historical reports available at http://www.usfca.edu/sobam/nvc/pub/svvcindex.html). This quarterly survey, which averages between 25 and 30 VC respondents, has maintained a pretty even keel until the most recent Q4 2007 result (surveyed in early January 2008):
VC confidence appears to have fallen off a cliff. Why? Some of the VC comments in the survey responses indicate concern over volatile public financial markets and credit uncertainty. A troubled NASDAQ makes one type of VC exit (sale of a VC-financed portfolio firm stake through an IPO) more difficult. Stalled credit markets can make acquisitions of VC portfolio firms by corporations (a common exit alternative) less likely as well.
With a weaker outlook for exits in the near term, VC confidence tends to decline. For example, Venky Ganesan of Globespan Capital Partners offered this sobering assessment, contending 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."
Additionally, Steve Carnevale of Point Cyprus Ventures projected:
"Short term, the credit crisis is really distracting the financial sector. Like its impact on the economy itself, it will probably be short lived, but it will reduce the enthusiasm for risk. The exit values will go down."
So what is likely to happen next? Well, lower VC confidence may result in a slowdown of financing activity for the near term. In some sectors, fewer new high-potential ventures may be financed. So entrepreneurs – who have been in a good position to raise financing in 2007 -- may find a somewhat more difficult road ahead in 2008. Of course, confidence can rise and probably will if the macro fundamentals improve. Recent interest rate reductions by the Federal Reserve and a likely fiscal stimulus package may do the trick if they help stabilize the financial markets.
What do you predict will happen to VC confidence in Q1 2008?
Related news, commentary, and predictions:
- Prediction: The USF VC Confidence Index will rise to 3.70 or greater in Q1 2008
- Analysis: China VC confidence index sees mild drop
- Analysis: European VC deals hit record low — depressing for startups
- News: VC tech spending saw surge in 2007
- News: Leading VC firm Kleiner Perkins loses partner in China
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Comments
Hi Mark,
An additional factor to consider is the increasing role of angel investors and networks to fill the lower investment demands for seed and early-stage companies. I attended a recent SVASE event where the panel topic was - "Can you start a successful Web 2.0 company with less than $1 million?" These smaller funding amounts are not the focus on the traditional VCs. With the need for the big exits that come with biggest 1st and 2nd round funding by the traditional VCs, the current financial market is certainly impacting VC confidence levels. Angels tend to take a longer view and can afford a bit of patience not afforded to VCs.
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