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Silicon Valley investors may be excited about all the wacky innovation in their backyard, but the political environment and global economy is really bringing them down.
Optimism among venture capitalists in the area dropped to the lowest level in almost a decade in the fourth quarter, according to the Silicon Valley Venture Capitalist Confidence Index, a quarterly survey of 28 Bay Area VCs released on Thursday. Confidence hasn't been this low since 2009, when the country was still mired in a historic banking and housing crisis.
"Seldom have political concerns so significantly impacted confidence and the factors that underpin the venture creation and innovation machine of Silicon Valley," wrote Mark Cannice, a professor at the University of San Francisco School of Management, in the report, which he's been producing since 2004. "However, current political wrangling, both domestically and abroad, now threatens the smooth functioning of the venture creation business model."
The survey results account for the start of the government shutdown, which began as the year was wrapping up and threatened to disrupt the 2019 IPO pipeline. It created yet another challenge for a technology industry that's already concerned about a potential trade war with China and additional regulation, following the privacy-related issues that have plagued Facebook and Google.
In the public markets, tech stocks took a dive in the fourth quarter, with the Nasdaq suffering its steepest quarterly decline since the end of 2008. Apple plummeted 30 percent, Amazon plunged 25 percent and Facebook dropped 20 percent.
That all raised the prospect of lower valuations in the private market and a tougher environment for capital raising.
"Given the stock market volatility, the venture market may well begin to pull back," said Lisa Suennen of Manatt Phelps & Phillips' venture fund, in the report. "The stock market is a leading indicator for venture activity, and despite there being a lot of cash out there, market instability creates somewhat of a chilling effect. If the market pulls back hard and stays there, venture valuations will drop."
The confidence index registered a 3.2 on a 5-point scale, dropping from 3.52 in the third quarter. In 2014 and 2015, the index was generally around 4, while at points during the financial crisis it fell below 3.
Macro concerns aren't the only headwinds that investors see on the horizon. They're also worried about the costs of living and operating a business in the Bay Area, where home prices and salaries are among the highest in the country.
"With reports of entry-level engineering salaries topping $200,000 in some cases, we are on a path that is simply not sustainable, or healthy," said Bob Ackerman, founder of venture firm AllegisCyber. "The costs of doing business and competition for talent are eroding the return profile for start-up companies in Silicon Valley, opening the door for other geographies to compete for the attention of innovators."