Too much of something isn’t always a good thing. Even when it’s money.
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A recent survey reveals that even venture capitalists are concerned there’s too much capital in the private markets. And that may not play out well for valuations.
For the third quarter of 2019, the The Silicon Valley Venture Capitalist Confidence Index – a quarterly undertaking that has been conducted by Mark Cannice of the University of San Francisco for the past 15 years – index registered 3.58 on a 5 point scale (5 indicates high confidence, 1 low).
What does that mean exactly? Well, it’s not great news. This quarter’s index measurement fell from the second quarter’s index reading of 3.76 and below the nearly 16-year average of 3.70.
But it is better than the 2018 fourth quarter, when the confidence result marked the lowest index reading since the first quarter of 2009, the end of the last global financial crisis.
A number of things are at play here.
To Cannice, the decrease in sentiment is partly due to concerns “on lofty valuations due to a continuing enormous supply of capital being made available to new ventures as more mega funds ($500M or more) are being established.”
Indeed, funds from the likes of SoftBank are shelling out large amounts of capital with increasingly disappointing returns.
In response to the survey, VCs gave their two cents. Menlo Ventures Partner Venky Ganesan wrote that the private markets have been fueled “by the availability of cheap capital and the surge of new entrants to private investing.”
An Industry In Flux?
All the political and economic uncertainty (think impeachment hearings and trade wars) is not helping, according to Cannice.
Ricky Lu of China-based CZV Capital said the trade uncertainty has continued to put pressure on the venture community and increased scrutiny of startups.
Meanwhile, the disappointing public performances of deeply unprofitable companies is not helping. (Uber & WeWork, we’re looking at you).
Cannice concluded his report by writing “With new sources and unprecedented amounts of capital being made available to new ventures and evolving expectations of public markets for venture-backed firms in terms of paths to profitability, it could be argued that the venture industry is itself in the midst of a transformation.”
Illustration: Li-Anne Dias