And The Survey Says: VCs Are More Optimistic

It’s not exactly sweeping the nation, but when a sliver of optimism emerges from the doldrums of Silicon Valley, the financial community stands up and takes notice.

Perhaps that’s why a survey released last week by Deloitte & Touche Corporate Finance that shows VCs are optimistic for the first time is getting people in the industry excited.

According to Deloitte’s Silicon Valley Venture Capital Confidence Survey, VCs expect the overall economic climate to improve during the next six months. Not wowed yet? Consider this was the first time the majority of VCs responded so optimistically since the study was created. This was the study’s fifth edition.

However, such statements are peppered with caution. VCs anticipate a U-shaped recovery, meaning a gradual uptick in investing, rather than a sharp V-shaped recovery, which would indicate a rapid upswing in investment activity.

VCs are bullish on Internet security and biotechnology in particular, as 60% of those surveyed indicated these sectors should see the most activity during the next six months. Investments in the software and semiconductor industries are expected to remain active, while media and telecommunications are expected to decline.

Survey respondents indicated that fund raising will account for less than 10% of their time. And 83% expect to find M&A activity to be the key liquidity driver for the first quarter of this year.

“After widespread predictions of a meltdown, we are pleased to see a mature response from the venture capital industry focusing on building a sustainable level of investment in the near term,” says Graham Watson, a managing director for Deloitte who is based in Northern California.

Ah, but what about those IPOs? Yes, even exit valuations have been tainted by the gravy train, as 89% of VCs predict exit valuations will remain the same or improve during the next sixth months. Compared to how the new issues market looked in second half of 2001, the response from VCs indicates that the market may have already hit rock bottom. And more than half believe that the combined valuations of all current portfolio companies will be higher in six months, relative to cost.

On that note, working with distressed portfolio companies in 2001 left VCs little time for anything else. Now, according to the survey, 75% of VCs anticipate that time spent with portfolio companies will remain the same or even decrease. And 83% indicated they declined an investment opportunity last year due to concerns over management integrity.

The 160 venture capitalists surveyed each manage funds in excess of $50 million.

Colleen O’Connor can be contacted