The venture capital industry’s biggest canary-in-the-coal-mine indicator – the confidence level of Silicon Valley venture capitalists – has set off another alarm. VC confidence is down to its lowest level in two years. Why?

A big factor is the valuations of startups. In other words, VCs are having to pay a bigger price for ownership shares. But there are more.

“While an expectation of a continued strong exit market – both initial public offerings (IPO) and mergers and acquisitions (M&A) – for venture-backed firms remained, along with an abiding confidence in the Silicon Valley ecosystem for new venture creation, increasing concern about high valuations of venture-baked firms restrained sentiment,” says Dr. Mark Cannice at the University of San Francisco, which has published the index for nearly 12 years..

While there’s little rain in the Valley – or most of California for that matter – the VCs’ collective attitude is pouring rain on the recent trends of good news in the startup-focused industry:

  • Record fund-raising
  • Big growth in investments

Yet in the latest Silicon Valley Venture Capitalist Confidence Index, VC confidence fell to 3.73 on a 5-point scale. That’s a second straight quarterly drop (from 3.81) and is a two-year low.

However, it must be noted, the 3.73 matches the overall average in 11-year index, the report notes.

So why the downward trend?

  • High valuations
  • Crowdfunding and other alternative means of financing
  • The global economy
  • The high cost of doing business in the Valley

Why should Triangle and North Carolina startups care?

With a continuing lack of institutional capital in the region, startups are looking West more than ever for dollars. And Silicon Valley investor deals in the Triangle are no longer a rarity.

“Modest decline”

Cannice is hardly panicking over what the survey shows, but the SV collective attitude does run counter to recent trends and a continuing wave of exits through IPOs as well as mergers-acquisitions.

“The modest decline in confidence came amidst strong industry metrics in VC fundraising and investments, and exits of venture-backed firms,”  Cannice writes.

“For example, the NVCA and Thomson Reuters reported the highest level of venture capital fund-raising since 2007. Of course, the greater supply of funds available also makes possible the higher levels of valuations that give some venture capitalists pause.

“The NVCA and PWC also reported the highest level of venture investments since Q4 2000. This wave of capital being put to work will certainly nourish new venture creation and innovation while also providing the demand that drives up valuations for the most promising projects.

“IPO activity for venture-backed firms in Q2 also increased significantly from the previous quarter but was down from the year earlier quarter, signaling a healthy exit environment but one that is not operating at the same pace of VC fundraising and investments”

Cannice also notes that the index is “forward looking” – a gauge of action expected six to 18 months down the road so “this disparity is not unusual.”

However, he adds the drop “suggests that additional consideration of potential future trends is warranted.”

Note: For the complete Q2 2015 Silicon Valley VC Confidence report, please contact Anne-Marie Devine Tasto at Cannice is chair of the USF School of Management and professor of entrepreneurship and innovation.