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Silicon Valley VCs Are More Confident Than They've Been in Years

Confidence among West Coast startup investors has reached a level not seen since 2007. For some VCs, though, the level of excitement is something to be cautious about.
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Silicon Valley venture capital investors are as confident as they were before the Great Recession and are looking forward to an active 2014.

The latest reading of the Silicon Valley Venture Capital Confidence Index, released this week, came in at 3.94 on a 5-point scale. That’s the highest level of confidence since the third quarter of 2007, just before the economic downturn.

The index, which has been produced quarterly for the last decade, was based on a survey of 32 venture capitalists in the San Francisco area.

Confidence levels have been trending higher for the past year and a half. “The steady rise in confidence suggests that a stabilizing macro environment is providing a firmer foundation for positive momentum in venture investing in 2014,” writes Mark Cannice, author of the report and professor with the University of San Francisco School of Management.

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In particular, Silicon Valley venture capitalists said they are feeling good about increased exit opportunities in the public markets, namely in terms of initial public offerings.

“I sense venture confidence is heightened, with plenty of startup capital available

and flowing again,” said Igor Sill of Geneva Venture Management, in a comment, in the report. “And, the IPO market has finally returned. I’m very excited about what 2014 holds in store for venture investors. My only concern is whether there will be enough good deals out there for us to put all this money to work rationally.”

Another venture capitalist echoed this enthusiasm, saying that the recent large tech IPOs are a harbinger of healthy exit activity for smaller tech companies. “Good performing tech IPOs brighten the prospects for all young tech companies, and I am optimistic that 2014 will be a strong year,” said Sandy Miller of Institutional Venture Partners. “There’s never been a moment in history when there are so many private venture-backed technology companies with real scale and rapid growth.”

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Other VCs raised concern that the industry's confidence is a bit of a red flag. Younger companies ought to be aware of “valuation inflation” and “over investment in ‘hot categories,'” said John Malloy of BlueRun Ventures.

In particular, social media and social commerce are two areas that are in the “risk of overheating,” says Robert Ackerman of Allegis Capital. If a venture capital market accelerates too much too quickly, then the market may get ahead of itself and trip itself up. “The success of recent IPOs has also spawned an unusually high level of interest in later stage companies approaching the IPO market, potentially distorting the historic relationship between valuation and business fundamentals. This ‘distortion’ portends a speed bump ahead in segments of the innovation economy,” Ackerman says.

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