The Funded: Bay Area VCs' confidence remains shaken, a new study indicates

Silicon Valley's venture capitalists are, by nature, an optimistic bunch, willing to invest large sums in nascent companies that — much more likely than not — will fail.

But their confidence appears to have been shaken a bit lately.

Every quarter for the past 19 years, University of San Francisco School of Management professor Mark Cannice has been putting together the Silicon Valley Venture Capitalist Confidence Index, which seeks to track the sentiments of area investors. For his ongoing study, he surveys Silicon Valley-based venture capitalists, asking them to rate their investment confidence on a five-point scale, then compiles their ratings into a single score, or index, that he tracks over time. While that index has seen plenty of ups and down over that period, particularly during the Great Recession and the beginning of the Covid-19 crisis, the average confidence rating over that period is 3.66.

But in the fourth quarter, the index was at 3.25, essentially unchanged from the third quarter. Although that's up a bit from the recent nadir of 3.0 in the second quarter of last year, it's well off the recent peak of 4.16 set in the second quarter of 2021.

The uncertain economic environment is weighing on investors' confidence, Cannice said in a press release announcing the latest update to the index. The venture capitalists, or VCs, who took part in the latest survey cited high inflation, volatility in the public markets and international conflict as reasons to be cautious, according to the news release. Such factors have led to a dramatic slowdown in companies going public or being acquired, have depressed startup valuations and led to venture investors curtailing their investments.

"While optimism in the long-term strength of the entrepreneurial ecosystem remained among the VCs responding to the (fourth quarter) survey, macro issues weighed on the VC business model and, thus, on VC sentiment for the near term," Cannice said in the news release.

But hope is around the corner, Cannice said in the full fourth-quarter index report. Startup valuations have fallen to more reasonable levels, he noted. The pool of talented employees available has increased because of widespread layoffs. And there are new and enticing areas of innovation awaiting funding, including in artificial intelligence, he said.

Such factors "suggest a turning point in the entrepreneurial ecosystem later in 2023," he said in the report.

Meanwhile, local startups announced just a handful of funding rounds at the end of what for many venture investors was apparently winter vacation week. Here were the ones that were announced:

Fundings