Venture capital confidence rebounds in Q4

Venture capital data chart
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Start-up investors are feeling a little more hopeful after a rough year, as valuations shake out in Silicon Valley, according to research released Thursday.

Confidence among Bay Area venture capitalists hit 3.59 on a scale from 1 to 5 in the fourth quarter of 2015, the first uptick after three consecutive quarters of declines, the University of San Francisco said. Though confidence has rebounded from its recent trough, it's still below the 12-year average of 3.72, according to the survey of 30 venture capitalists.

Concerns about high valuations and public market volatility have eased as investors forgo hype and focus on business fundamentals, respondents told professor Mark Cannice, who oversees the survey. But as the buzz over so-called unicorns dies down, the rate of new investments may slow accordingly over the next six to 18 months, they said.

The slower pace in Silicon Valley might be helping differentiate the great companies in the marketplace, thus the rising confidence, Gerard van Hamel Platerink of Redmile Group said in the survey. Curtailing the more "exuberant speculation" might be healthy and good, Dag Syrrist of Vision Capital said in the survey, even if it leads to downward pressure on the sector.

Venky Ganesan of Menlo Ventures told Cannice the market for funding start-ups is due for a correction, and venture capitalists must adjust their expectations.

"We will see a pullback in late-stage financings and even some layoffs, but the long-term value proposition of technology driven change remains intact," Ganesan said.

The uptick comes after increasingly heated debate over the last two years about whether start-ups were in a bubble that was about to pop, Tyler Willis, entrepreneur and angel investor, told CNBC.

"Growth companies specifically have historically been able to raise lots of money at high valuations, and investors were willing to pay for growth even if the company didn't know how they wanted to make money yet," Willis said. "That's over. It ended summer of last year, I would say."

But rather than "pulling the rug out" like in 2001 or 2008, there was a slow contraction or "return to rationality" as more fair-weather investors, like corporations and hedge funds, gradually left the start-up market in pursuit of less risky ventures. As a result, investors can now get a discount when investing in companies relative to last year, Willis said.

That's a good thing because as if venture capitalists hit the right level of confidence, more innovation is created for all of us, according to Willis.

Unicorn risk/reward 'out of control': Pro
Unicorn risk/reward 'out of control': Pro

"The market was overconfident a year ago and would pay well ahead of what a company's current progress justified," Willis said. "Three months ago we were probably overly fearful. The world seemed to be changing dramatically. Today a lot more people are carefully optimistic."

To be sure though, despite the survey's results, not everyone is sighing a breath of relief in Silicon Valley. Entrepreneur-turned-VC Mark Suster of Upfront Ventures took to his blog Thursday to warn that "winter is coming" to California's sunny technology campuses.

"Frankly, it's really hard to write checks at later-stage valuations when you know you'll have to exit into the public markets or sell to a public-market company one day and the stocks are declining precipitously," Suster wrote in his blog.