Venture capitalists are now less optimistic about the entrepreneurial atmosphere in Silicon Valley over the next 6 to 18 months, according to the Silicon Valley Venture Capitalist Confidence Index, which reported its first drop in confidence in more than a year.
Based on a June survey of 32 Silicon Valley VCs, the index (PDF) dropped to 3.28 on a 5-point scale (1 indicating low confidence and 5 indicating high) for the second quarter. The latest number showed a decline from the first quarter's mark of 3.65 and ended a five-quarter rise in confidence after hitting a low at the end of 2008.
The downturn in confidence was sparked by concerns over sluggish economic growth in the U.S. and abroad as well as regulatory uncertainty in the VC industry, according to the index.
Several of the venture capitalists interviewed for the survey believe the still struggling economy may dampen investments, with one VC noting that the industry is basing its long-term investments more on short- and medium-term worries. Two VCs also said that fear is growing over the fragile economies in Europe and China and that both markets need to be watched for any impact they may have on business opportunities over the next year.
Some of those interviewed also cited changes to the venture business itself as a reason for the drop in confidence. One VC said that shifts in the business will limit the availability of capital at the exact time that entrepreneurs need money. Both this person and another VC expressed fears over a proposal from Congress to dramatically increase the tax on long-term investments or "carried interest tax," with one calling it a "disaster for the U.S. venture capital industry, and for U.S. innovation and economic growth."
Despite concerns over the economy and their industry, some VCs remain optimistic and still see opportunities and new businesses arising despite a difficult environment.
Some noted that venture capitalists and entrepreneurs are innovative and resourceful and will find ways to adapt to challenging conditions. One VC said that opportunities will still present themselves to entrepreneurs even though funding may be limited. Others were more cautiously optimistic, with one saying that innovative technology companies are strong, but the industry is still focused on the economy and regulatory environment.
Overall, the lower confidence level expressed in the second quarter will likely lead to a slower IPO market in the third quarter, according to the report.
An ongoing survey, the Silicon Valley Venture Capitalist Confidence Index measures the forecasts of professional venture capitalists over the growth opportunities for entrepreneurs in the San Francisco Bay Area over the next 6 to 18 months. The index report is authored by Mark Cannice, a professor at the University of San Francisco School of Business and Professional Studies.