VCs' Confidence on a Decline in Silicon Valley and China

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Fremont: Venture Capitalists today are facing with fewer exit options, declining capital commitments and are making fewer investments in new high-growth ventures in Silicon Valley and in China. This has resulted into a decline in their confidence. The Silicon Valley Venture Capital Confidence Index for the third quarter of 2011, based on a September 2011 survey of 33 San Francisco Bay Area venture capitalists, registered a further low to 3.41 on a 5 point scale dropping significantly from the previous quarter's reading of 3.66. This is the second consecutive decline in the confidence index of the VCs. The report is authored by Mark Cannice who is a professor of entrepreneurship and innovation at the University of San Francisco School of Management. The U.S. is undergoing financial crisis, and now it has become a global issue infecting countries and industries that have little or nothing to do with the crisis. China, despite of very strong economic growth, is also facing the similar scenario in the VC fraternity. Cannice indicates, "A number of responding venture capitalists in the Q3 survey pointed to troublesome macro conditions, an uncertain exit environment, high valuations, and regulatory burdens." Some of the main concerns of the VCs are not the great team and opportunities, it is rather the disconnect between private and public valuations and the possibility of the economy to worsen in the near future effecting the startup world directly. In China, the confidence in the future high-growth entrepreneurial environment sunk to its lowest point, 3.21 on a 5 point scale, in the history of six and a half year old on-going quarterly survey. VCs estimate that the continued uncertainty in the market will lead to more concern on the erratic, inconsistent and unduly lengthy regulatory process and this might have a long-term negative impact on the VC fraternity and their business model in terms of funding and investments. The IPO valuation of Chinese companies have dropped down in both domestic and global stock markets due to the accounting irregularities of some Chinese IPO firms disappointing global investors and negatively impacting the VC industry. According to Reuters in China, more than 24 Chinese firms that went public in the U.S. have had accounting problems since March. The continuing downfall in the confidence among the Vcs reiterates their on-going concern on the overheated market and suggests that VCs are reviewing their investment strategies. The ongoing European debt crisis also adds concern for VCs and are discouraging them from new investments. The whole industry is keeping its fingers crossed to see the light on the other side of the tunnel very soon.