Venture capitalist optimism up – slightly, says the Silicon Valley Venture Capitalist Confidence Index.

So why should North Carolina and southeast startup entrepreneurs as well as investors care?

Because when it comes to VC, the Silicon Valley wizards of investing set the pace for the entire industry.

When they see reasons to invest and believe the economy justifies deal, the attitude spreads to investors elsewhere plus the major funds and other backers who choose to put money in venture funds.

In other words, the Silicon Valley VCs are the straws that stir the investing drinks.

The latest survey, out Wednesday and based on data from 31 VCs, shows that the confidence of the all-important-to-startup-investing Valley VCs across Silicon Valley is higher optimistic than they were last quarter.

Still, their attitude remains far worse than before the Great Recession.

The index rose to 3.53 on a scale of 5, with 5 indicating high confidence. That’s up from 3.47 last quarter, which marked a big decline from the first quarter at well over 3.5. However, confidence had plunged the previous three quarters, making 2011 pretty abysmal.

It’s hard to remember, but VC optimism way back in Q1 2007 was right at 4.5.

Then we all know what happened.

The index is designed to measure VC attitudes over the next six to 18 months, so any positive news at all bodes well for future deal making.

However, even the increase masked concerns, the survey’s authors note.

“Although the  Index edged higher, the venture capitalists who responded to the Q3 survey pointed to concerns over stubbornly high valuations despite recent venture-backed public market disappointments such as Facebook, Zynga, and Groupon, and despite the overall performance of the venture asset class,” the survey reported.

“Furthermore, funding available for life science ventures continues to be limited, and macro economic and political uncertainty are affecting investments across industry sectors.

“Notwithstanding these concerns a number of this study’s participants reported a positive sentiment assured that Silicon Valley remains the epicenter of technology innovation and new venture creation where trends in analytics and IT infrastructure are providing opportunities for well managed ventures that solve enterprise issues.”

Dr. Mark Cannice at the University of San Francisco, who writes the report, noted several highlights:

  • Despite concerns about the broader economic and political environment, a number of the responding venture capitalists to the Q3 survey reported positive sentiment, concluding that as positive technology trends continue, they will be developed in Silicon Valley.
  • A renewed focus on value creation with strong management in new ventures along with an improving exit market have helped support optimism.
  • Rising sectors that rely on the development of emerging technologies also point to opportunities. 
  • Another VC contributor who provided comments in confidence saw opportunity based on “1. The number
  • of proposals that we receive, 2. Monetization models that are becoming clearer although most of them are
  • still dependent on ‘advertising’ as the basis for their revenues, 3. The growth of ‘local and mobile’
  • experience, 4. The growth of analytics to get better insights into consumer likes and dislikes, etc.”
  • Despite the aforementioned positive observations, concern regarding the capacity of the entrepreneurial environment to support high-growth ventures was voiced.
  • Bill Reichert of Garage Technology Ventures explained “The crush of new start-ups springing up here and coming from all over the world is incredibly exciting, and it is threatening to overwhelm the system’s capacity to support them, despite the healthy recycling of funds back into the system from a continuing good pace of solid hits plus quick flips. 
  • Inflated valuations coupled with the weak Facebook IPO and the performance of the venture asset class also weighed on confidence. 
  • National and international macroeconomic and political issues increased uncertainty. 
  • In healthcare, continuing concerns over capital availability and the resulting impact on innovation were raised. 
  • In summary, despite concerns over the uncertainty from Europe and China, the presidential elections, inflated valuations, returns on the venture asset class, and a lack of funding in life science investing, confidence edged up on average among the venture capitalist respondents in Q3. 
  • However, the number of new funds increased so the new capital raised was not as concentrated as in previous quarter. If this quarter signals a trend, capital for innovations that coincide with new venture creation may be restricted, but what innovations are supported will tend to stretch across more sectors and lead to necessary and unexpected new products. Ideally, though, political and economic uncertainty will decline in the coming weeks and months, and in this more predictable environment, pent up strategic decisions and investments will be made and provide a better context for the entrepreneurial and innovative ecosystems in Silicon Valley and across the country.