Venture Capitalists' Confidence Dropped Sharply Last Quarter: Report

A shaky macroeconomic environment is dragging down some investors' confidence, according to a new report.

It's venture capitalists in this case, who cited a number of factors for a sense of diminished confidence in the final quarter of this year. The VCs reported lower confidence due to rising costs of doing business, high valuations and longer exit times for startups, as well as macroeconomic issues including rising interest rates and uncertain trade policies.

The quarterly survey, conducted by USF professor Mark Cannice, tracks sentiment among the Silicon Valley venture capitalists that invest in private tech companies. Though the survey was conducted in late September and October -- and prior to the Fed's decision in December to raise benchmark interest rates by a quarter-point, to 2.5% -- respondents expressed concern about market volatility to come.

"The sugar high of low interest rates and a very accommodative Federal Reserve is going away, and we are going to see a major downturn. Time to find your seats because when the music stops, it is not going to be pretty," wrote Venky Ganesan of Menlo Ventures. "While I am very optimistic for the long run (5-7 years), the short term forecast is cloudy with a good chance of rain."

Similarly forecasting market turmoil, Dag Syrrist of Vision Capital wrote: "Macroeconomics are stacking up against a moderate future, between all-time high public markets, rising interest rates and a divergence of US and foreign market returns."

Venture capitalists may be in a good position to predict market trends because of the nature of the industry, noted Cannice: "This insight and predictive value are perhaps not surprising given the nature of the venture capital business model which relies on longer-term perspectives...and is also informed by operating at the intersection of private capital investment and public capital exits," he wrote.  

In 2019, the tech IPO lineup is expected to be robust provided that markets remain somewhat stable, with highly-valued names like Uber, Lyft, Palantir and Pinterest expected to go public next year. But market turmoil could change that -- and that potentially spells trouble in the venture capital industry. 

"To the extent that market volatility decreases chance of an exit, this is a negative for the VC business model," Cannice noted.