Supergiant rounds are a daily occurrence, but venture capitalists’ confidence is not keeping pace. In the past week, two reports show that VCs are concerned for the future of the market, at least in the short term.
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However, another indicator points towards the technology market looking stronger than it has since 2000. The contrast is notable and potentially troubling. Here’s what the data is telling us.
We’ll start with the aptly named Silicon Valley Venture Capitalist Confidence Index, a quarterly survey that has been conducted by Mark Cannice of the University of San Francisco for the past 15 years. This past quarter, Cannice collected responses from 28 Bay Area VCs.
The Silicon Valley Venture Capitalist Confidence Index for the fourth quarter of 2018 registered 3.2 on a 5 point scale (5 indicates high confidence, 1 low). What does the figure mean? That this quarter’s confidence result marked the lowest index reading since the first quarter of 2009, the end of the last global financial crisis.
More recently, it compares to a score of 3.66 recorded during the fourth quarter of 2017. A few external factors are at play, but a combination of general political uncertainty, its impact on the health of the venture ecosystem, and broader macroeconomic concerns appear to have the most impact, according to the report.
The Cannice survey wasn’t the only negative indicator on tap recently. In January, Fortune surveyed a record 604 readers of its venture capital-themed newsletter Term Sheet. The survey found that 41 percent of respondents had no or little confidence in the U.S. national economy compared to eight percent last year. Also, 53 percent had no or little confidence in the global economy compared to four percent last year. Approximately 30 percent of respondents work in private equity, 21 percent work in venture capital, with the rest being investment bankers, LPs, operating executives and third-party vendors.
Taking both sets of data, confidence is down, and more specifically, it’s down when it comes to what’s next for the economy.
But not all data trends negatively.
While the survey data tracking human sentiment isn’t looking good, a Fed index that tracks the tech sector is looking quite strong. Indeed, the Federal Reserve Bank of San Francisco’s Tech Pulse, an “index of coincident indicators of activity in the U.S. information technology sector,” is heading up and to the right at the moment. This is as hot as tech has been since the 2000 boom, which famously turned to dust after the hype faded and all that was left was the smell of burning cash. But could there be a correction coming? Investors on the record are, unsurprisingly, optimistic and cautious at the same time.
Charlie Plauche, a partner at Austin-based S3 Ventures, acknowledges “there is definitely uncertainty in the macromarkets.” As such, he warns “entrepreneurs to exercise caution when increasing burn.”
“We have seen many of our portfolio companies raise or consider raising a new round sooner than planned in anticipation of a pullback in the equity markets,” Plauche wrote via email. “All of this said, we (still) believe that now is still an amazing time for technology companies to be born and we are actively looking to find and invest in them.”
Kristian Andersen, co-founder and partner of Indianapolis-based High Alpha believes that most investors are preparing for some kind of pullback from the current “frenetic pace and amount of investing.”
“There are a number of issues that could cast a shadow on venture in 2019, such as the government shutdown leading to a backlog of pending IPOs and the threat of a trade war with China having a chilling effect on certain equity markets,” Andersen told Crunchbase News. “With that said, a month and half into 2019, we are seeing a robust, even optimistic, investment landscape. My belief is that great companies are built (and funded) in both up and down markets, and I expect to see a bit of both in the year to come.”
Meanwhile, Mark Platshon of Ice Breaker Ventures (formerly Birchmere Ventures) said he was concerned that the government shutdown, China trade war, Brexit and other political traumas “could trigger slower growth or a recession,” according to USF’s release.
John Malloy, general partner at BlueRun Ventures, believes that access to capital “is already constricting” and will only get worse.
“Having macro political machinations directly impact the specific dynamics of venture growth is a rare occurrence in the 15-year history of this ongoing quarterly research,” USF’s Cannice said. “This should be a signal to policy makers in the U.S. and beyond to curtail the uncertainty that is directly impacting innovation and economic growth.”
So which will win out? Optimism or fear? Today, optimism, but it seems clear that the Silicon Valley equivalent of consumer sentiment has turned sour and could curdle your favorite startup.
Illustration Credit: Li Anne Dias
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