The University of San Francisco Silicon Valley Venture Capitalist Confidence Index

Second Quarter – 2005
(Release date – July 21 – 2005)

The Quarterly University of San Francisco Silicon Valley Venture Capitalist Confidence Index is based on a survey of San Francisco Bay Area/Silicon Valley venture capitalists. Created and authored by Professor Mark Cannice and Professor Roger Chen of the University of San Francisco School of Business and Management, the USF Index (Bloomberg ticker: USFSVVCI) measures and reports the opinions of professional venture capitalists in their estimation of the high-growth venture entrepreneurial environment in the San Francisco Bay Area over the next 6 - 18 months.

In publishing a recurring confidence index of professional venture capital investors, the USF Entrepreneurship Program intends to provide an on-going leading indicator of investment in new high growth businesses in the San Francisco Bay Area. We expect that this forward looking indicator of Bay Area new venture investment and high growth entrepreneurial activity will also act as a fair proxy for new venture investment across the U.S., as the San Francisco Bay Area is the largest source of venture capital in the nation.

The USF Silicon Valley Venture Capitalist Confidence Index for the second quarter of 2005, based on a July 2005 survey of 37 San Francisco Bay Area venture capitalists, came in at 4.14 on a 5 point scale (with 5 indicating high confidence and 1 indicating low confidence), and suggests a very healthy level of Bay Area venture financings and entrepreneurial activity in the coming months. The 2nd Quarter Index Level rose significantly from the previous quarter's level of 3.96 on a 5 point scale, and is the highest level of venture confidence seen over the last year..

We see clear turning point in venture capialist confidence to the upside from what was a modest downtrend during the last four quarters. This spike in confidence appears to be based on significant new venture fund raising as well as the flow of those funds into new ventures.

The very strong confidence level in the first quarter of 2004 appears to have stemmed mainly from high expectations of an impending recovery which would include the opening up of IPO markets, better macro economic numbers, and increased corporate spending. Confidence in the last 3 quarters of 2004 trended down somewhat as the reality of business conditions and investment opportunities, while good, may have not quite met the high expectations voiced earlier in the year.

This quarter's survey reveals a high optimism. Overall, the absolute Index level of 4.14 in this latest quarter is highly favorable and projects continued health in the Bay Area entrepreneurial environment.

All of the Index respondents’ names and firms are listed below, save those who wished to remain anonymous. Many of the responding venture capitalists also went on the record with commentary that supported their degree of confidence in the upcoming venture investment environment. In the following analysis, we provide many of their comments.

Strong Confidence in the venture environment was the general theme. Ann Winblad indicated that, "Hummer Winblad Venture Partners invests exclusively in new software opportunities. We are currently in a strong innovation cycle for software on both the enterprise and consumer fronts. In the last 16 months we have funded a dozen new software startups, 10 in the Bay area." Also confident, Venky Ganesan, Globespan Capital Partners, commented, “We have turned the curve and the road is clear. The legacy issues caused by the Internet bubble have been mostly cleared, enterprises have gone from “shell shock” mode to “normal business” mode where they are willing to make capital investments to improve productivity..." Echoing this sentiment, Bart Schachter of Blueprint Ventures offered that, "We are exiting the tech depression and preparing for another 10 year cycle." Similarly, Peter Wolken of Capital Valley Ventures projected the (Bay Area) as a "Better environment than there has been for the past four plus years." Cautious Optimism was offered by Sanford Miller of 3I who shared, "I am relatively optimistic about the venture environment over the next year. Young companies are seeing meaningful customer traction, even some in the areas that have been most difficult -- enterprise and telco infrastructure."

This high level of broad confidence seemed to emanate from several distinct factors.

Venture fund raising and venture investing is strong. Dave Epstein of Crosslink Capital confirmed, that "Lots of $$ were recently raised. Anxious VC's want to put it to work. Merger mania continues." Richard Yen of Blueprint Ventures added, "There has been significant VC funding activity over the last quarter, in particular with follow-on fundraisings. The fundraising timeline is becoming contracted, which is good news for entrepreneurs since they are spending less time raising money and more time building their companies." Joe Mandato, De Novo Ventures, "There are large volumes of available money given recent fund-raising by a number of firms. There seems to be more and higher quality opportunities" Further, Kurt Keilhacker of TechFund Capital, confirmed, "The investment environment continues to strengthen and a number of promising new companies are being financed.” And Robert Marshall of Selby Venture Partners commented that, "The venture environment continues to improve. New funds have successfully raised money and early stage activity is healthy." Bob Ackerman with Allegis Capital indicated his high rating was ".. based on the large number of funds raising money this year. All of those firms will be in the market with fresh cash. This historically has resulted in a larger number of companies being started and funded." Mike Rocke of Rocke Capital Ventures, confirmed, "There are some new Bay Area funds starting up, which is an indication of positive momentum in the startup area."

Concurrently, entrepreneurial talent is abundant. Fred Dotzler of DeNovo Ventures, pointed to, "Availability of capital and availability of founding teams seeking capital." Kirk B. Westbrook of Invencor, added, "The immeidate availability of both capital and experienced talent already present in the Bay Area, coupled with a culturally supportive environment of risk taking continues to provide the area with a differentiator that facilitates emerging endeavors." Jim Marshall, Selby Venture Partners, finds "The environment is improving and there's a ton of new innovation happening. Entrepreneurs are taking risks again and venture firms are funding new ideas again."

Higher Valuations were observed by some respondents. Brendan Richardson of Vision Capital noted, "Continued enthusiasm on the part of investors to fund deals and increasing valuations. Particular segments of interest seem to be environmental (clean technology), energy and semiconductors." Similarly, David DeRuff of East Peak Advisors added, "...M&A and Venture activity is accelerating as well. In two recent M&A projects, we have seen substantial competition between multple bidders and significant sales price improvements."

A maturing technology paradigm
Robert Troy of Geneva Venture Partners, provided a comprehensive analysis, "We have entered a high-tech maturity cycle prone to large deployment of technology. The key word is to spread for accessing the mass market. More and more, creative entrepreneurs come to the Bay Area to launch their new ventures and our deal flow is better and better. These entrepreneurs not only bring technological innovations taking advantages of the new trends in mobility, bandwidth, voice and video over IP, customer electronic, embedded systems and regulations, but also new business models absolutely required to succeed in this cycle. They certainly find a very receptive environment eager to finance great ideas as reflected by the rebound in Venture Capital, up to the point of being, sometimes, excessively competitive. Silicon Valley is moving up the value chain and I believe this is the best which can happen. We still need to go through the re-balancing between what must be done in the expensive Bay Area and what could be done elsewhere, this is still work in progress and challenge for entrepreneurs and their executive teams."

Deepak Kamra, Canaan Partners, "Strong growth and increasing customer traction in certain technology related markets - eg internet and telecomm"

Supporting factors also bouyed confidence.

Increases in technology spending Igor Sill of Geneva Venture Partners observes, "increased purchasing expenditures of technology by Fortune 500 companies".

With regard to international sector, Randolph L. Tom of Dynasty Capital Services confimed, "I have high confidence in the future of the high-growth venture entrepreneurial environment in the SF Bay Area. Dynasty has observed a tremendous surge in interests in mid-market companies seeking all sorts of liquidity opportunities. We see a large opportunity in Asian companies being able to partner with U.S. partners, particularly venture capitalists whose portfolios are in need of China exposure or Asian relationships. The acquisition of public companies indicates a need for China to deploy its foreign reserves, which means there should be active M&A activity for large public companies as well as pre-public entities to be purchased.

With regards to medical technologies, Jan Barker of MedVenture Associates, offered that, "Healthcare remains an interesting and diversified area for investors to find lucrative opportunities for success."

Within the energy sector, Bryant Tong of Nth Power "..continues to see much activity both in new business plans and new venture firms investing in the energy technology space. More money into this sector brings better management teams and in certain cases, better venture partners to syndicate with. On the other hand, more money sometimes brings over inflated pricing. Careful and knowledgeable investing is critical in this sector. Knowing the history of certain energy sectors, and knowing what has worked and what hasn’t is helpful in avoiding those same mistakes today." And, Arno Penzias of NEA expressed high optimism due to ".. opportunities for new companies aimed at blended US-overseas operations and marketing--as well as for differentiated approaches to energy generation, storage and distribution technologies.

Still a pragmatic outlook was maintained by some. Steve Dow of Sevin Rosen Funds communicated, "Given that our investment pace has been reasonably constant for 24 years, I guess I would have to pick “3” – not too hot, not too cold. A successful investment, when initially made at the seed or Series A stage, has typically taken 5-7 years to get liquid – we are not smart enough to know the future that far in advance, so investing more or less aggressively based on the environment today makes no sense to us. "

While Concerns were voiced by others. David Pidwell of Alloy Ventures "The state of the financial economy....interest rates, unemployment levels, fuel costs, the Iraq war, and the risk of inflation all add up to an unstable environment for venture spending". Graham Burnette, SBV Venture Partners, "High deficits in US budget likely to slow economy and result in decreasing stock market. This will probably depress venture activity." While Dag Syrrist of Vision Capital was "More optimistic about consumer driven end use vs corporate buying of product and services companies typically backed by venture funds. Less optimistic about company formation in the Bay Area given very high local cost structure – directly and indirectly – in locating companies in the region vs other parts of the US or Europe." An anonymous contributing vc stated, "High cost of doing business in the Bay Area coupled with aggressive regions/goverments outside of the Bay Area luring business and entrepreneurs away. Other entrepreneurial 'hubs' are being formed elsewhere that are capable of advancing innovation in a more cost effective manner."

A distinct shift from the cautious optimism of the previous quarters to widely shared high confidence in the high growth venture environment appears to be taking hold now. This shift is primarily driven by increases in venture funding and the willingness to deploy it to promising new ventures

To sum, the overall VC Confidence Index level appears to have undergone a distinct positive shift after levelingoff last quarter from a noticeable down trend the previous 3 quarters. The uptick of the relative index level and the boradly positive comments from the venture capitalists surveyed indicate an increasingly upbeat sentiment for venture capital investment in the coming months, and bode well for strong health in entrepreneurial activity and new company formation in the San Francisco Bay Area for the blance of 2005.

Please see the report for the previous quarter at: http://www.usfca.edu/sobam/nvc/cindex_4_2004.htm.

Look for the 3rd Quarter 2005 USF Silicon Valley Venture Capitalist Confidence Index in July 2005. Venture capitalists who wish to participate in next quarter’s Index survey or become involved with the USF Entrepreneurship Program are asked to contact Professor Mark Cannice at Cannice@usfca.edu. Please find additional information about the University of San Francisco School of Business and Management Entrepreneurship Program (rated Top Tier by Entrepreneur Magazine – 2004 & 2005) and it's International Business Plan Competition at: http://www.EntrepreneurshipProgram.org.

Mark V. Cannice, Ph.D.* is an Associate Professor of Entrepreneurship and the Founding Executive Director of the University of San Francisco Entrepreneurship Program (Cannice@usfca.edu).

Roger Chen, Ph.D.* is an Associate Professor of Management at the University of San Francisco (Chenr@usfca.edu).

Copyright 2004 - 2005, by: Mark V. Cannice, Ph.D.**

*The authors wish to thank the participating venture capitalists who generously provided their expert analysis and commentary. We also wish to thank Ling Ding (USF MBA 2006), our dean's fellow research assistant, who provided essential and extensive support in our survey effort as well as copy editing our manuscript.

**Webmasters are welcome to link to this page with courtesy notification to Cannice@usfca.edu. To post this report on your website, please request permission by email to Cannice@usfca.edu. When citing the index, please refer to it as:

The University of San Francisco Silicon Valley Venture Capitalist Confidence Index, and include the associated Quarter/Year, as well as the full names of both authors. Thanks!