Silicon Valley Venture Capitalist Confidence Index

(Bloomberg ticker symbol: SVVCCI) Second Quarter 2012

(Release date: July 24, 2012)

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 second quarter of 2012, based on a June 2012 survey of 30 San Francisco Bay Area venture capitalists, registered 3.47 on a 5 point scale (with 5 indicating high confidence and 1 indicating low confidence.) This quarters index fell back from the previous quarters sharp rise in confidence and reading of 3.79. Please see Graph 1 for trend data.
Graph 1

Trend line of Venture Capitalists' Condence

over the last 34 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 new venture environment. Questions about this 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:

Venture capitalists confidence in the future high-growth venture environment in the San Francisco Bay Area declined significantly in the second quarter of 2012. This decline followed a strong upward surge in the previous quarter. Concerns over macro issues such as the fate of Europe, regulatory constraints in the life science arena, and disappointment in the Facebook IPO overshadowed a steady confidence in the positive technology trends (e.g. cloud, mobile, social) that are centered in the Valley and faith in entrepreneurs to build innovative business models to leverage these technological trends in relevant market segments. However, as capital continues to flow into the industry (albeit in a more concentrated manner) and the exit market gains momentum, the venture capital business model for most sectors appears vibrant and should remain so for the balance of 2012. 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 wished to remain anonymous. Global macroeconomic issues continue to weigh on confidence. Deepak Kamra of Canaan Partners indicated that Macroeconomic headwinds in Europe and Asia impacted his confidence in the entrepreneurial environment. Elton Sherwin of Ridgewood Capital also pointed to macro issues such as the slow down in Europe that is affecting start-up company orders. He asserted that as start-ups conduct business internationally more now than in years past, this slow down overseas (Europe and China) will impact start-up firms more than previously. Meanwhile Bob Pavey of Morgenthaler Ventures expects the entrepreneurial environment could get worse or better my bet is slightly better than even odds on better. Macro concerns aside, ultimately, all business is local. Shomit Ghose of Onset Ventures emphasized that The innovation economy in Silicon Valley continues to hum along, despite the coughs and sputters in the global economy. Technology trends favor the Valley. Jeb Miller of Jafco confirmed that Silicon Valley remains the epicenter of the three most disruptive trends in technology: cloud, mobile and social. Jeremy Liew of Lightspeed Venture Partners added We're seeing real innovation across multiple Internet categories, from gaming, to commerce, to social, to financial services. It's the first time in a long time that we're seeing such broad based creative energy, versus being confined to one vertical. And John Malloy of BlueRun Ventures predicted We are still in the early stages of migrating from desktop centric Internet services to mobile first services. The SF Bay Area will lead in this transformation for the next three to five years. Facing Facebook. Venky Ganesan of Globespan Capital Partners pointed out that The Facebook IPO might have flopped but the disruptive trends around mobile, cloud and social remain very much intact. We are in the midst of a really unique time in technology and many industries in the world are going to be fundamentally reshaped by these changes. Ignore the cassandras of the world and seize the moment to change the world. Sandy Miller of Institutional Venture Partners further explained that The market has largely moved beyond the shock of the disappointing Facebook IPO. There seems to be a good balance of supply and demand. Venture funding is available and there are a plethora of really interesting private technology companies. There are an unprecedented number of fast growing private technology companies of real scale ($50 million or more). I think it will be an active second half and especially in Q4. Bob Ackerman of Allegis Capital reflected While the Facebook debacle signaled the recalibration of investor expectations around social media and reaffirmed the importance of earnings and customer ROI, the broader innovation ecosystem in Silicon Valley is very much alive as the entire information technology substrate is in the process of being redefined and reinventedThe availability of capital and

talent remains a challenge as creative innovation accelerates. And Bob Bozeman of EastLake Ventures added FB momentum was certainly a disappointment but the liquidity net result was still a big positive. The Kauffman Report plus liquidity challenges by LPs are still an overhang on new funds but are not affecting quality venture funds apparently. Thoughtful capital is available but metrics are changing. Debra Beresini of invencor stated The investment community is actively writing checks, but is being very cautious. Experienced teams who have done it before have a much easier chance of being funded. And Roy Thiele-Sardina of HighBAR Partners detected greater sanity in pricing and also a move toward more in-depth products such as infrastructure, databases and network management rather than gaming applications. With respect to capital availability, Thomson Reuters and the NVCA reported fewer larger funds being formed in Q2.2 The continuing concentration of venture capital among fewer funds may, over time, impact the business models of new companies as pressure for larger liquidity events will likely follow the trend of larger fund size. The exit market is supporting confidence. Eric Buatois of Sofinnova Ventures sees Good M&A from corporate and an open IPO market. He continued, saying There is a lot of variety of plans in different market segments. Still, Thomson Reuters and the National Venture Capital Association calculated that the number of venture backed IPOs decreased substantially in Q2 despite a record increase in capital raised due to the Facebook offering.3 Focusing on future exit potential, Igor Sill of Geneva Venture Management noted that With 168 companies now in the IPO pipeline our economy is definitely showing strong signs of realizing continued returns for venture investors. IPOs are the major liquidity realization in this asset class followed by M&A. I see the remainder of 2012 as a banner year for venture backed tech stocks. One of the tech bell-weathers, ORACLE, reported fiscal year 2012 4th quarter results with strong growing revenues, non-GAAP operating margin of 50% and a cash hoard of $31 Billion. Oracles continued growth is predicated on staying ahead via acquisitions generally of venture capital backed startups. As the capital markets recover, the venture capital segment excels. Opportunity knocks and sometimes moves. Tom Baruch of Formation 8 observed a Migration of startup activity from the South Bay to Downtown SF. Investments in companies offering new business processes based on their integration with social networks more than offsets the decline in so-called cleantech investing. Likewise, Bryant Tong of Nth Power offered that Even though cleantech has a tarnish to its name, energy technology is still doing well. Healthcare policy may be having unintended consequences for healthcare venture financing and innovation as on-going regulatory constraints continue to test the venture business model in the life sciences. Joe Mandato of De Novo Ventures perceived Continued uncertainty in the medical device segment re regulatory pathways and reimbursement. Gerard van Hamel Platerink of Accuitive Medical Ventures attributed his confidence rating to exposure to healthcare which continues to be challenged with numerous VC firms pulling back from the market. Continuing regulatory challenges coupled with a tough financing environment is causing investors to focus on existing deals rather than new investments. I unfortunately do not foresee this changing for the foreseeable future. Leon Shen of Skyline Ventures linked his confidence to the time frame under question, reasoning that The constriction in LP funding of healthcare venture capital broadly is stifling the potential of the entrepreneurial environment and I expect this to take a little time to recover from. That being said, given the constriction in capital but the steady if not growing innovation from universities and small private
2 3

Thomson Reuters and NVCA Press Release, July 9, 2012. Thomson Reuters and NVCA Press Release, July 2, 2012.

biotech/medical device, I firmly believe that this is the best possible time to be investing in this sector. The funds of this era (2012-2014) should outperform healthcare venture funds of the past and may reverse this trend. However, I dont believe this will change in 18months, but rather in three years or more. A respondent who provided perspective in confidence shared In healthcare, while there is some great innovating going on by entrepreneurs, the rapidly declining availability of capital among healthcare VCs is severely limiting the number and type of opportunities that are getting funded. There has been a significant decline in early-stage venture capital available, particularly for medical device investments, that will mean fewer companies to invest in down the road. Another respondent who requested anonymity linked a low confidence rating to the Regulatory environment for medical device industry and lack of capital. While concerns over global macroeconomic uncertainty, regulatory oversight in healthcare, and the Facebook IPO debacle dragged down sentiment overall, confidence in the fundamentals of the venture model persists. As technology trends that are changing the face of business and social interactions continue to find their start in Silicon Valley, and related and supporting local industries support their development, the long term outlook for the high-growth entrepreneurial environment appears sound. Despite the macroeconomic and regulatory constraints that ruled the day in Q2, the projection of a more welcoming exit market, and continued focus on technological, market, and business model innovation points to a brighter outcome for the balance of 2012.

Table 1 Participating Venture Capitalists in the 2012 2nd Quarter Confidence Index Survey Participant Bill Byun Bob Bozeman Bob Pavey Bryant Tong Dan Lankford Debra Guerin Beresini Deepak Kamra Elton Sherwin Eric Buatois Gerard van Hamel Platerink Igor M. Sill Jeb Miller Jeremy Liew Joe Mandato John Malloy Karan Mehandru Leon Chen Robert Ackerman Roy Thiele-Sardina Sandy Miller Shomit Ghose Standish OGrady Tim Wilson Company 7 Capital Eastlake Ventures Morgenthaler Ventures Nth Power Wavepoint Ventures invencor Canaan Partners Ridgewood Capital Sofinnova Ventures Accuitive Medical Ventures Geneva Venture Management Jafco Ventures Lightspeed Venture Partners De Novo Ventures BlueRun Ventures Trinity Ventures Skyline Ventures Allegis Capital HighBar Partners Institutional Venture Partners Onset Ventures Granite Ventures Artiman

Tom Baruch Tom McKinley Venky Ganesan Anonymous Anonymous Anonymous Anonymous

Formation 8 Cardinal Partners Globespan Capital Partners Anonymous Anonymous Anonymous Anonymous

Mark V. Cannice, Ph.D. is 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 2012: Mark V. Cannice, Ph.D. All rights reserved.