Confidence Survey Shows Anything But

We all knew the economy was bad, but it turns out that many VCs in a recent poll think it’s getting worse. You might think that in the denouement of the beautiful summer months in the wine country, Silicon Valley VCs would be in a good mood, but the results of Deloitte & Touche’s third-quarter confidence survey show that VCs may be feeling a bit woozy from the heat.

One third of the 100 VCs who returned their surveys expect exit valuations to continue to decline over the next six months, and 23% expect the economy also to get worse. About half of them expect the situation to remain the same-that’s 56% predicting stable exit valuations and 55% predicting economic stasis. Only a handful of VCs thought the economy and exit valuations would show signs of improvement.

“There hasn’t been any fundamental change in the cautious signs we’ve seen over the past nine months or so,” says Graham Watson, managing director in Deloitte & Touche Corporate Finance LLC, which has been running this survey for seven quarters.

“The last quarter hasn’t led anyone to suggest we’re anywhere close to the trough yet. Each quarter there seems to be some sort of event that gets people focused on the short-term,” he says.

Watson points out that despite the short-term shake-ups, VCs expect to keep their portfolio companies for the long term. No VCs polled expects to exit their investments in less than three years. “It’s surprising how much short-term dynamics are affecting sentiment,” he adds.

While the Deloitte survey did not include a question about fund-raising this quarter, it asked if any fund anticipates reducing its size over the next six months. Four funds say yes; 93 say no.

“Very few suggest they are going to reduce the size of their fund in the next six months,” he says. “It may be the fact that those funds who are not giving back capital are merely acknowledging that the climate for raising capital is so difficult.”

On the other side of the coin, the survey indicates we can expect a handful of new cutbacks over the next few months.

Among the other pessimistic responses in the survey, 54% expect transactions in the battered media and telecommunications sectors to decrease over the next six months.

If these predictions bear out, the wine of choice this winter may be anything in a big bottle with a screw top.

Contact Charles Fellers