Light at the End of the Tunnel?

July 7, 2009 at 12:40 pm

Most indicators for the venture capital industry are down significantly. As indicated by the latest Moneytree Report, funding is down (Q1/09 investments are at the lowest level since 1997), valuations are down (87% of Q1/09 venture rounds are flat or down, as reported by Cooley Godward Kronish), and the industry is in a slump and is trying to reinvent itself (as remarked earlier).

Curiously, the Silicon Valley Venture Capitalist Confidence Index for the Q1/09 actually rose to 3.03 from 2.77 (with 5 indicating high confidence and 1 indicating low confidence). This is the first substantial uptick in eight quarters.

Is this a green shoot, a regional curiosity, or just a statistical oddity based on survivorship bias?

Venture capitalists of course have to be professional optimists, and for those funds with money to invest, things are looking up indeed: valuations may be down, but this makes for more upside once the economy recovers. The economy is still falling, but the free fall has slowed to a steep downhill: the feared total collapse of the financial system has given way to a recapitalization of financial institutions, deleveraging of the economy, and a somewhat orderly restructuring of the manufacturing sector. Some of the responding VCs see the downturn in the economy as an opportunity to build great companies, pointing to the talent now available and the necessity of capital-efficient business models.

Overall, the confidence index may be a leading indicator. Low valuations may not be likable to entrepreneurs, and companies still face an uncertain or even non-existent exit market, but buying low was never bad for investors.

Gunther Hofmann is a Vice President of The Brenner Group and has done extensive work in valuations, M&A, venture capital, and corporate finance with significant international experience in small firms as well as global corporations. Gunther earned a Masters Degree in Electrical Engineering and Business Administration from Darmstadt University of Technology in Germany, and was a Visiting Scholar at UC Berkeley. He is a holder of the Chartered Financial Analyst designation, and a member of the National Association of Certified Valuation Analysts. Gunther is Chairman of the Software/IT Industry Group of the German American Business Association (GABA).

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