Venture capital sentiment surges as tech IPOs pop

Nutanix IPO celebration at the Nasdaq market site in New York, September 30, 2016.
Source: Nasdaq

Start-up investors showed a jolt of optimism in the third quarter, thanks to some initial public offerings, after a first half with none.

Confidence among venture investors jumped 8 percent in the period, the biggest increase since the first quarter of 2012, according to the Silicon Valley Venture Capitalist Confidence Index. Based on a 5-point scale, confidence rose to 3.88, from 3.6 in the second quarter, the report said.

The survey of 32 venture capitalists by Mark Cannice, a professor at the University of San Francisco School of Management, showed that while exit activity is still historically slow, there are reasons to be excited heading into the new year.

"The VC-backed tech IPO market is showing signs of life this fall, with a number of IPOs recently completed and on the docket," Sandy Miller, a partner at Institutional Venture Partners, said in the report. "Assuming the IPOs perform well, I think we will see a robust IPO calendar post-election and throughout 2017."

Twilio's debut in June was the first by a U.S. venture-backed technology company in 2016. Since then, there have been five offerings, highlighted by Nutanix's share sale in September.

All six companies to go public this year have priced within or above the expected range and are currently trading higher than the initial price.

At 3.88, confidence is at its highest since the fourth quarter of 2014 and is above the 13-year average of 3.71.

Still, there's plenty of skepticism in the market. Private company valuations that got out of control in recent years haven't fully rationalized, big acquisitions are still relatively sparse, and there's the prospect of rising interest rates.

"There is still a lot of capital waiting to be deployed but the `valuation hens' have come to roost," said Gerard van Hamel Platerink, a managing director at health care investment enterprise Redmile Group. "The bar has been raised and the reset is in process."