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Valley VCs continue to worry

by Tom Park  |  Published February 1, 2012 at 4:36 PM
Confidence among Silicon Valley venture capitalists declined for the third quarter in a row, revealing continued concerns among private investors for the near-term future of startups in the region.

According to the latest Silicon Valley venture capitalist index, which is based on a poll of private investors regarding their views of the entrepreneurial environment over the next six to 18 months, VCs are concerned about economic uncertainty, uneven funding from limited partners, a challenging exit environment and regulatory roadblocks.

This drove the 30 VC respondents polled in December to register an index value of 3.27 on a scale of 1 to 5, with five indicating "high confidence." This marks a decline from the 3.41 index value in the third quarter, and the lowest index since the fourth quarter of 2008, when the economy slid into recession.

Many of the usual issues continued to weigh on VCs in the fourth quarter, the report found, including uncertainty in the global economy and the debate over how to tax investment gains.

"Plenty of good company ideas [are] out there, but carried interest tax policy prospects and general economic uncertainty are dark clouds above our ecosystem," commented one anonymous VC respondent cited by the survey.

But the quarterly poll, conducted by Mark Cannice, a professor at the University of San Francisco School of Management, also highlighted concerns over a reduction in funding for seed-stage companies as venture firms raise increasingly large funds. For example, VC firm Andreessen Horowitz this week announced a new $1.5 billion fund, bringing its level of assets under management to about $2.7 billion.

"There has been some consolidation in the venture industry, which is driving larger funds, which have to make bigger investments," Cannice said in an interview Wednesday. "Less money goes to smaller, seed-based startups. Over the long run, the question becomes: What impact will this have on innovation? This is a major concern among VCs."

The study quoted Bill Reichert, a managing director with Garage Technology Ventures LLC, who said: "The lack of institutional LP support for early stage venture capital will leave hundreds of companies stranded when they need more capital later next year."

The less-than-vibrant initial public offering market, despite the looming milestone offering of social networking giant Facebook Inc., also continues to dampen VCs' outlook, the survey found.

As far as specific investment areas go, health sciences startups continued to face their own set of unique issues. Survey respondents said they were concerned about risks stemming from Food and Drug Administration approvals for new products and Medicare or Medicaid reimbursements -- or the potential lack thereof -- for certain novel treatments.

"The environment continues sluggish; regulatory hurdles remain high; the lack of clarity on the proper path also continues," wrote Joe Mandato of De Novo Ventures, as cited by the survey. "There is continued limited partner apathy towards the space!"
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