Local venture capitalists’ outlook on the future of their industry dimmed between the first and second quarters of this year but is brighter than it was this quarter last year, according to a report released Tuesday by the University of San Francisco.
The Quarterly Silicon Valley Venture Capitalist Confidence Index rated investor confidence at 4.15 on a five-point scale, a drop from 4.38 in the first quarter, which was the highest mark in the four years of the ongoing survey. The score is still higher than the Q2 result for 2006, which was 3.88.
“What I was trying to get at is what venture capitalists think will be happening a year from now,” said USF Associate Professor of Entrepreneurship Mark Cannice, the study’s author. “I think the biggest change is that there’s more of an opportunity for venture capitalists … to take their firms public. There’s an opening of the initial public offering market. Up until the last couple of quarters, it’s been very difficult to get most tech companies to an IPO.”
Richard Yen, a principal at South City’s Blueprint Ventures, concurred that an improved environment for IPOs is driving his present optimism. Initial public offerings, in which stock in a company is offered for the first time on the stock market, provide a chance for venture companies to “exit,” or recoup their investment in a start-up firm and turn a profit.
“It’s the steady stream of IPOs that have really impressed me,” Yen said. “Every week, you see tech companies that have been around for years and have generated solid revenues [going public]. It’s been the volume more than one shining star.”
Investors also saw high valuations of company worth, new technologies gaining strength in new markets and globalization as reasons for a positive outlook, according to the survey.
But others worried that hype, high valuations, world events and the potential for reduced merger and acquisition prices could affect the market. Their views brought the survey’s score to a more cautious level than in Q1.
“All the leveraged buyout is a function of cheap money,” said Dag Syrrist, general partner of Burlingame’s Vision Capital, who added that he believes interest rates will rise, causing buyout firms to reduce the amount they are willing to pay for companies as credit becomes more expensive.
The survey itself is quite simple: Cannice contacts approximately 300 local venture capitalists quarterly and asks them to rate their confidence from 1 to 5, and then explain their reasoning and ask if they can be quoted in the survey.
“I think it’s useful just to know how others are thinking. It’s a good study,” said Karl Handelsman, managing director of CMEA Ventures.