Silicon Valley Venture Capitalist Confidence Index™

(Bloomberg ticker symbol: SVVCCI)

Third Quarter – 2017

(Release date: December 30, 2017)

Mark V. Cannice, Ph.D.

University of San Francisco School of Management

The Silicon Valley Venture Capitalist Confidence Index™ (Bloomberg ticker symbol: SVVCCI) is based
on a recurring quarterly survey of San Francisco Bay Area/Silicon Valley venture capitalists. The Index
measures and reports the opinions of professional venture capitalists on their estimations of the high-
growth 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 third quarter of 2017, based on a
September 2017 survey of 25 San Francisco Bay Area venture capitalists, registered 3.43 on a 5-point
scale (with 5 indicating high confidence and 1 indicating low confidence). This quarter’s index
measurement declined from the previous quarter’s index reading of 3.52; it is also well below the nearly
14-year average of 3.71. Please see Graph 1 for trend data.

Graph 1
Trend line of Venture Capitalists' Confidence
over the last 55 quarters

4.5
Confidence Index

3.5

2.5

Time

1
Questions about this ongoing research study or related topics should be sent to Professor Mark Cannice at Cannice@usfca.edu.

1
Silicon Valley venture capitalists’ confidence in the future high-growth entrepreneurial environment
fell to its lowest reading in two years in the third quarter of 2017. While some VC respondents
pointed to powerful new technologies being developed by determined entrepreneurs that may transform
industries for their positive sentiment, concern over continued high valuations along with increasing time
to liquidity and a slow exit market in Q3 with only 8 VC-backed firm IPOs2, pressured the venture
business model and weighed on confidence3. The pace of VC investment activity, both in terms of total
capital deployed and the number of deals, also declined in Q3 from the previous quarter (although full-
year levels of capital investment are on pace to be very strong).4

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 confidentially.

While average confidence declined, some responding venture capitalists had a positive assessment of
the overall entrepreneurial environment due to the potential long-term impact of transformational
new technologies. For example, Venky Ganesan of Menlo Ventures maintained “We remain in a
goldilocks macro environment. Not enough inflation to raise interest rates and just enough growth and job
gains for the Fed to stay still. The venture environment for early-stage investing remains robust as the
trend of software eating the world continues its march. Newer areas with a lot of venture interest includes
cryptocurrencies, vertical SAAS, and marketplaces. Right now, the motto in Silicon Valley is ‘Keep Calm
and Invest on.’” Voicing a similar assessment, Jeb Miller of Icon Ventures assured “The Bay Area remains
the epicenter of startup activity taking advantage of the replatforming of apps to cloud and mobile
solutions that will transform vertical market and functional use cases. The incumbent vendors are
struggling to keep up with the pace of innovation which we expect will fuel a healthy exit environment to
keep the cycle going.” And Roy Thiele-Sardina of HighBar Partners added “We are seeing increased
activity in the Enterprise Software Space as well as infrastructure software.” More broadly, Jon Soberg
indicated “I think the market is good, with exciting technologies creating huge opportunities.” Finally,
John Malloy of BlueRun Ventures concluded “Thoughtful innovation trumps negativity.” Additionally, in
the life science sector, one VC respondent indicated that a lot of money is flooding in, with increasing
interest in digital health.

An increasingly diverse exit market also supported optimism. Sandy Miller of Institutional Venture
Partners contended “It is a good environment for investing in late-stage tech companies.” He continued,
saying an “unprecedented number of scaled growing tech companies are still private. Valuations
moderated from the froth of 2014-2015. And the exit environment is interesting with new innovation
happening (SPACs, Direct Listing, Vision Fund) as well as a strong M&A market with both corporate
strategics as well as private equity firms acquiring venture-backed companies.”

However, traditional exit opportunities have slowed. Howard Lee of Founders Equity Partners
observed “Decreased exit activity in 2017 compared to 2016 as seen in fewer IPOs and a slowdown in
M&A activity have led both investors and entrepreneurs and founders to focus on raising capital and cash
management strategies. Accordingly, with the lengthening time to exits there is continued growing interest
and awareness among these entrepreneurs and founders in partial liquidity for employee retention. This
decreased exit environment has also seen investors becoming more active in later-stage companies.

2
PitchBook-NVCA Venture Monitor Report Q3 2017.
3
Related empirical studies (e.g. Cannice and Goldberg 2009) have shown that VC confidence is most closely
correlated with the ability to take portfolio firms to an initial public offering so the decline in sentiment tied to
unmet liquidity expectations is not unexpected.
4
PitchBook-NVCA Venture Monitor Report Q3 2017.

2
However, this activity appears increasingly selective as valuations remain high among a small number of
companies.” Another VC respondent blamed a “lukewarm IPO market” for declining sentiment. In fact,
the total number of exits in Q3 2017 was the lowest since 2009.5

High valuations also are causing concern. Mohanjit Jolly of Iron Pillar wrote “There is a dichotomy in
the market currently. On the one hand, there is a lot of capital that has been raised over the last two to
three years. On the other hand, there is concern around the lofty valuation expectations being driven by the
bull stock market, as well as the dozens of on-paper Unicorns. I believe that sentiment is going to keep the
venture investment (especially mid-late stage) activity under check for the foreseeable future. We have
also been in a bull market for almost a decade, so whether it's 6, 12 or 18 months, we are bound to see
some level of correction in the not so distant future.” One other venture capitalist respondent also noted
“Overvalued private and public markets rule the day today, but in 18 months or so a reversion to more
rational valuations is likely.” Finally, Gerard van Hamel Platerink of Redmile Group explained “Too
many companies are still trying to catch up with extended valuations – many will continue to creep down
in the coming quarters. However, we see many new exciting companies that have the ability to become
important and valuable companies.”

The broader environment is also weighing on sentiment. Mark Platshon of Ice Breaker Ventures
forecast “The dysfunctional situation with Congress and the Administration is going to hurt growth and
consumer/business optimism at some point soon.” Additionally, Bob Ackerman of Allegis Capital argued
“The Bay Area innovation ecosystem is experiencing too much of a Good Thing. The combination of too
much capital funding too many undifferentiated companies has resulted in a market with a very tight
labor/housing dynamics and rapidly escalating salaries and costs of doing business for start-ups. This
fundamentally alters the relationship between risk and reward. The pattern is simply not sustainable.”

Offering a comprehensive analysis, Dag Syrrist of Vision Capital indicated that “Uncertainty across the
spectrum, from fiscal/policy to geo-political, makes it harder to plan and deploy capital long term. None of
which is helpful. The overhang in the venture market is leading to more funding than otherwise would be
given the erratic political environment as well. We’re in 8th year of expansion and unless we have
inadvertently done away with business cycles, this one will come to an end too. Early leading indicators
seems to suggest soon(ish), regardless, general rising interest rates will give alternatives for ideal cash to
be deployed, further reducing the attractiveness of risk-adjusted venture allocations. Of course, I’ve been
predicting the turn with complete certainty for some quarters now…” However, one venture capitalist
respondent who provided commentary in confidence disagreed with the preceding points, noting “The
overall environment is favorable: stock market valuations are favorable; there is ample liquidity; the
regulatory environment is improved; and there is the prospect of tax reform favorable to corporations. The
reasons that the environment is not a 5 are: no major ‘must-have’ technologies that large enterprises are
purchasing (humdrum business investment environment), and valuations in venture investments are high
due to competition (lots of liquidity) and high stock market valuations. It is a good time to raise venture
capital.”

To sum, while a number of VC respondents noted positive aspects to the entrepreneurial

environment linked to high-potential new technologies gaining traction in the marketplace, broader
concerns over extended valuations, fewer liquidity opportunities, and an uncertain macro
environment and extended business cycle weighed on confidence. Furthermore, as venture capital
investments are becoming concentrated in fewer companies with overall declines in the number of firms
receiving investments, the long-term impact on the broader innovation ecosystem should be considered.
Still, the transformational power of scalable technologies being deployed by talented entrepreneurs makes
the current venture environment and its role in economic growth substantial. Public policy, in as much as it

5
PitchBook-NVCA Venture Monitor Report Q3 2017.

3
provides predictability and consistency, also plays a key role in providing a supportive entrepreneurial
framework that benefits not only continuing innovation cycles, but also the need for increasingly
sophisticated talent to develop and commercialize new innovations that ultimately support broader
regional and national public welfare.

Table 1
Participating Venture Capitalists in the 2017 3rd Quarter Confidence Index Survey

Participant Company
Bill Byun 7 Capital
Bill Reichert Garage Technology Ventures
Dag Syrrist Vision Capital
Dan Lankford Wavepoint Ventures
Gerard van Hamel Platerink Redmile Group
Howard Lee Founders Equity Partners
Jeb Miller Icon Ventures
John Malloy BlueRun Ventures
Jon Soberg Expansive Ventures
Karan Mehandru Trinity Ventures
Kurt Keilhacker Elementum Ventures
Mark Platshon Ice Breaker Ventures
Mohanjit Jolly Iron Pillar
Pat Kenealy Ridge Ventures
Richard Yen Saban Capital Group
Robert R. Ackerman, Jr. Allegis Capital
Roy Thiele-Sardiña HighBar Partners
Sandy Miller Institutional Venture Partners
Shomit Ghose Onset Ventures
Standish O’Grady Granite Ventures
Tom Baruch Baruch Future Ventures
Tom McKinley Cardinal Partners
Thomas Klein Persistent Ventures
Venky Ganesan Menlo 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 James Cannice and Joe Cannice for their 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 trademark of Mark V. Cannice. Copyright © 2004 –
2017: Mark V. Cannice, Ph.D. All rights reserved.