I have surveyed Silicon Valley Venture Capitalists each quarter since Q1 2004 about their confidence in the future high-growth entrepreneurial environment in the San Francisco Bay Area. About 30 venture capitalists respond to each survey, giving a quantitative measure of their confidence (1 low to 5 high) along with commentary to support their ratings. The report I just completed for Q4 2008 (33 survey responses were collected between January 2 and January 9, 2009) indicated the lowest level of VC confidence since I began the survey five years ago, with the confidence index dropping to 2.77

Venture Capitalists who responded to the current survey pointed to the severe economic downturn and the resulting negative impact on several aspects of the VC business model as the primary drivers of their declining sentiment. For example, T.C. Wang of Acorn Campus indicated "Uncertainties in the financial market for the next 12 months will clog the M&A and IPO pipeline worldwide." In fact, Thomson Reuters and the National Venture Capital Association reported several week ago that 2008 brought just six venture-backed IPOs. This is the lowest number since 1977. Further, 40 venture-backed firms withdrew their IPO registration in 2008 (Thomson Reuters and the National Venture Capital Association [January 2, 2009]. "Global Economic Crisis Weighs Heavily on Venture-backed Exits in 2008"). To this point, Igor Sill of Geneva Venture Management argued, "... With this liquidity void, we will see few, if any, new venture firms emerging, and frankly, few fund raising efforts from established firms. Some will even close down."

Despite the bleak financial markets, some VCs saw this time as an opportunity for identifying exciting new businesses. Sandy Miller of Institutional Venture Partners reasoned "2009 will remain a challenging year for exits with little to no IPO activity expected and M&A subject to lowered valuation realities. But it should be a great year for new investments." And Dag Syrrist of Vision Capital explained ". . . In hard times companies are forced to create valuable products and become relevant to their customers -- and investors -- both traits often overlooked in growth periods." Further, Richard Yen of Saban Ventures noted that "We're bullish about the investment opportunities in traditional early-stage companies."

Unlike most financial markets that fluctuate on a daily basis, the long-term time horizon of patient venture capital allows VCs to look beyond daily economic news. However, the continuing global decline has created severe strain on the VC business model. Specifically, liquidity events have become few and far between, potential limited partners are guarding their own cash reserves, and many corporate customers of the enterprises that VCs back have trimmed their capital spending. Thus, those entrepreneurs that continue to strive to raise venture backing must accept lower valuations, have a plan to achieve positive cash flow quickly, and most importantly, bring to market those products that provide exceptional value and are needed by the market now.

Despite the near-term challenges, a long term confidence in the resiliency of the entrepreneur and the support structure of the Silicon Valley eco-system remain. In fact, from a Darwinian perspective, the current harsh environment may lead to the ultimate creation of more sustainable ventures -- and the next wave of dramatic innovation.