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No shock here, but an index that measures the confidence of venture capitalists (aptly named the Silicon Valley Venture Capitalist Confidence Index) reached a new low in the third quarter. The index, maintained by the University of San Francisco and based on a survey of 33 San Francisco and Silicon Valley venture capitalists (why such a small sample?), fell to 2.89 on a scale of 5 from 3.07 in the second quarter. It was the fourth consecutive new low for the index, which was established in 2004 and peaked at 4.38 in the first quarter of 2007.

VCs attribute their lack of confidence on the deterioration of macroeconomic conditions, which have destroyed IPO opportunities for startups and are also suppressing tech M&A..

"Venture funds are frozen with uncertainty," says Dag Syrrist of Vision Capital. "Until some prolonged data showing the economy and markets stabilizing appears, funding will not increase again. While venture has the capacity to be counter-cycle, the majority of funds follow others in their investment activity and, therefore, will wait a significant period of time before increasing the deployment of capital. The combination of no exits and companies not meeting plan forces funds to focus on existing portfolio companies rather than new opportunities. The funds who have a critical mass of capital and long-term [Limited Partner] relations, and the experience of deploying capital ahead of improved market conditions, will do just fine, but they will be in the minority."

But where some people see gloom and doom, others see opportunity. Some VCs believe this is a good time to launch a firm, noting historical precedents. That logic may be based on the lower capital needs of seed-stage firms and the longer term time horizon of the venture industry.

Robert Ackerman of Allegis Capital argues that while there may be less startup activity over the next 12 to 18 months, "what there is will be of a materially higher quality." And Kurt Keilhacker of TechFund Capital notes that startups that are able to build or maintain technological beachheads while also managing their cash carefully "will find themselves in a future terrain with a lot fewer competitors."

No doubt, the next six to nine months will be tough for VCs and their startups. But many will survive, and good ideas will continue to be funded, though some companies that never should have gotten off the ground will be return, as it were, to earth. -- David Shabelman 

See details of Silicon Valley Venture Capitalist Confidence Index
See Oct. 15 post from WatchMojo.com
See Oct. 14 post from All Things Digital

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