Silicon Valley Venture Capitalist Confidence Index

(Bloomberg ticker symbol: SVVCCI) Fourth Quarter 2012

(Release date: January 24, 2013)

Mark V. Cannice, Ph.D. University of San Francisco The quarterly Silicon Valley Venture Capitalist Confidence Index (Bloomberg ticker symbol: SVVCCI) is based on an on-going 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 2012, based on a December 2012 survey of 30 San Francisco Bay Area venture capitalists, registered 3.63 on a 5 point scale (with 5 indicating high confidence and 1 indicating low confidence). This quarters index is up from the previous quarters confidence reading of 3.53. Please see Graph 1 for trend data.
Graph 1

Trend line of Venture Capitalists' Condence

over the last 36 quarters

5 Confidence Index 4.5 4 3.5 3 2.5

Time

Publishing a recurring confidence index of professional venture capital investors is intended to provide an on-going leading indicator of the overall health of the high-growth entrepreneurial environment. Questions about this on-going research study or related topics should be addressed to its author at Cannice@usfca.edu.

The Silicon Valley Venture Capitalist Confidence Index is sponsored in part by:

Notwithstanding the on-going macroeconomic uncertainty arising from national policy and budgetary debates, the determination and creativity of Silicon Valley entrepreneurs persisted, as did the optimism of their venture capital partners. Thus, the Index of Silicon Valley Venture Capitalists confidence in the future high-growth entrepreneurial environment in the San Francisco Bay Area rose in the fourth quarter of 2012. The modest increase in Q4 confidence made for two consecutive quarters of increasing sentiment in what marks the nine-year history of this quarterly survey and research report. In Q4 venture capitalists pointed to new sectors of opportunity that were developing in concert with technological and social trends. For example, momentum in the analysis of big data and the application of mobile solutions to the enterprise continued to increase. While concern over the inability of Washington to agree to a course that would ease rather than exacerbate economic uncertainty remained, the responding venture capitalists appeared to be compartmentalizing this external drag on economic activity and focusing on the manageable aspect of building innovative companies with determined entrepreneurs. 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 in confidence. Emerging technological and social-demographic trends are creating opportunities for new business sectors that innovative entrepreneurs in the Silicon Valley are addressing. Jon Soberg of Blumberg Capital commented We are seeing amazing new companies, and the major macro trends such as mobile adoption, improved capital efficiency, and globalization are providing plenty of new opportunities for great companies. Likewise, Jeb Miller of Jafco Ventures confirmed We are continuing to experience the massive disruption of major platform shifts to mobile and cloud in both the consumer and enterprise markets. Silicon Valley is leading the charge to drive these platform shifts and we remain very enthusiastic about the opportunity to launch new projects with amazing talent and ample funding options along with an improving exit environment on the back end. Given the macro trends and the entrepreneurial response, specific sectors of new venture opportunity are coming into greater focus. Igor Sill of Geneva Venture Management explained We have come to realize that one of the biggest changes in our lives has been the seemingly infinite amount of data, information, resources and choices we now have as a result of the Internet. We are far more informed, assuming we want to be. Businesses can now access and measure incredible volumes of customer data that simply did not exist a decade ago, and that brings venture investors huge opportunities for funding disruptive innovation in predictive analytics, big data, cyber security, mobility, mobile payments and cloud computing. 2013 is destined to be a good year for venture funding of these technologies. Similarly, another venture capitalist respondent who provided commentary in confidence pointed to the proliferation of mobile and consumer-oriented technologies in the enterprise, and the adoption of big data/analytics, (contending that) these were usually the domain of very large enterprises, but now even smaller companies are able to take advantage of these technologies Macroeconomic uncertainty aside, entrepreneurs are pursuing these new opportunities unabated. Shomit Ghose of Onset Ventures indicated The macro-economy is still facing some significant overhangs... But the start-up environment is extremely vibrant today, in large part due to new business models being built on the foundation of Big Data. And Bob Bozeman of Eastlake Ventures noted that lots of activity is shifting into new target areas. Meanwhile, Alain Harrus of Crosslink Capital indicated that software investments will continue to have strong momentum, and a venture capitalist respondent who requested anonymity commented that The Bay Area remains the center of digital electronic innovation.

Some venture investors were less sanguine about the entrepreneurial environment in the near term. John Malloy of BlueRun Ventures concluded The Valley is in a bit of a lull. Although I believe in our long term ability to regenerate and disrupt; in the short term my sense is that people are looking for a spark. Bill Reichert of Garage Technology Ventures counted Too many negative factors working against the global ebullience around innovation and entrepreneurship. Mr. Reichert continued, saying I think it is rational ebullience, not irrational. But it definitely seems like it's going to stay challenging to raise funding, and then follow on rounds, in most sectors. Financing and exit opportunities remain in some flux as the total amount of venture investment as well as the total number of venture-backed deals declined in 2012 from 2011.2 For example, Dan Lankford of Wavepoint Ventures indicated There are lot's of start-ups, and many are getting started with self funding or angel funding, since the cost of starting business has fallen. It has, however, become more challenging to raise an A round. However, Roy Thiele-Sardina of HighBAR Partners noted We are seeing more later stage (B & C) deals being funded. Sandy Miller of Institutional Venture Partners explained I think we will begin to see a return to normalcy in the Tech IPO market in 2012. The ingredients are all in place. We have a great crop of private VCbacked tech companies, probably the best ever. And the JOBS Act really helps on the regulatory front. And Dag Syrrist of Vision Capital reasoned US markets are likely to recover ahead of ROW, and attract capital, in spite of budget and political uncertainty. That said, I don't see great improvements on exits and liquidity any time soon. In fact, Thomson Reuters and the NVCA reported the number of venturebacked IPOs and M&As declined in Q4 from Q3 as well as from the year-earlier period.3 The broader macro environment continues to slowly improve despite political roadblocks, and this trend is being weighed by professional venture investors. For example, Bob Pavey of Morgenthaler Ventures provided The economy is likely to get a little better in spite of poor economic decisions in Washington, and this is likely to raise optimismand maybe even the stock markets. Furthermore, Bob Ackerman of Allegis Capital concluded Despite a political narrative calling for more innovation and resulting job creation, the inputs for the innovation economy are under severe stress. The lack of immigration reform for foreign born engineers and scientists, excess regulation, and punitive tax rates have entrepreneurs and their investors looking for opportunities outside of California. Debra Guerin Beresini of invencor explained her rating, saying it is going to be a bumpy road the next few months, but as Congress starts working across the aisle, the comfort level of large companies, small companies, investors and the general public will rise causing investment activity to increase albeit, on a base of tighter controls and more mindful choices from the investment community. One responding venture capitalist noted that the macro environment and fiscal cliff are big overhang problems at the moment, while another VC pointed to looming tax changes for GPs for his moderate confidence. Sector specific investment choices continue to vary in attractiveness. While the broader life science area has suffered from regulatory constraints and diminishing funding, Tom McKinley of Cardinal Partners indicated that healthcare technology-enabled services are becoming very hot and valuations are increasing rapidly. Another venture capitalist survey respondent who provided comment in confidence noted that Internet social application ventures were up while cleantech ventures were down.

2 3

NVCA and PWC news release dated January 18, 2013. Thomson Reuters and NVCA news released dated January 2, 2013.

Overall, confidence among venture capitalists in the Silicon Valley edged higher 4 in the final quarter of 2012 in spite of the drag that the continuing national political discord has placed on the economy. On-going political wrangling comes at a cost as high levels of political uncertainty tend to delay business decisions and diminish business investment. Thomson Reuters and the National Venture Capital Association reported that the number of new venture funds and the total capital commitments to those funds decreased significantly in Q4 2012 from the previous quarter as well as from the year earlier quarter.5 However, even with the political headwinds, opportunities arising from positive technological and social trends have appeared and are being ably addressed by determined entrepreneurs and their venture backers. New capabilities in predictive analytics that allow large and small businesses to more effectively serve their customers are being crafted and implemented. Mobile applications for the enterprise are also rolling out to new business sectors and creating efficiencies that allow their adopters to more effectively compete in an increasingly globalized and competitive marketplace. If the political and regulatory environment were to become more predictable for forward-looking business decisions and long-term venture investments, the positive effects of these innovative and entrepreneurial efforts would be magnified and lead to even greater solutions and opportunities for the New Year.

Table 1 Participating Venture Capitalists in the 2012 4th Quarter Confidence Index Survey Participant Alain Harrus Bill Byun Bill Reichert Bob Bozeman Bob Pavey Bryant Tong Dag Syrrist Dan Lankford Debra Guerin Beresini Deepak Kamra Elton Sherwin Igor M. Sill Jeb Miller Jeremy Liew John Malloy Jon Soberg Karan Mehandru Kurt Keilhacker Peter Fenton Robert Ackerman Roy Thiele-Sardina Sandy Miller Shomit Ghose
4

Company Crosslink Capital 7 Capital Garage Technology Ventures Eastlake Ventures Morgenthaler Ventures Nth Power Vision Capital Wavepoint Ventures invencor Canaan Partners Ridgewood Capital Geneva Venture Management Jafco Ventures Lightspeed Venture Partners BlueRun Ventures Blumberg Capital Trinity Ventures Techfund Capital Benchmark Capital Allegis Capital HighBAR Partners Institutional Venture Partners Onset Ventures

The 7th quarterly Global Confidence Index, released just ahead of the World Economic Forum in Davos, also indicated a rising trend in confidence in world economic conditions among its respondents. (World Economic Forum News Release dated January 23, 2013.) 5 Thomson Reuters and NVCA news release dated January 7, 2013.

Standish OGrady Tim Wilson Tom Baruch Tom McKinley Wayne Cantwell Anonymous Anonymous

Granite Ventures Artiman formation | 8 Cardinal Partners Crescendo Ventures Anonymous Anonymous

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 on-going support of this research, as well as to Jack Cannice for his 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 2004 2013: Mark V. Cannice, Ph.D. All rights reserved.