VCs Say the Worst Is Over

A bit of cheer has emerged on the venture capital front: According to a recent survey conducted by consultancy Deloitte & Touche LLP, VCs on both coasts of the U.S. are starting to feel better about loosening up the purse strings and investing in startups again.

While not entirely lifting the fog of economic gloom, D&T's survey of approximately 1,200 venture capitalists found that nearly 90 percent of the respondents believe it's OK to start investing in technology startups again, while nearly 93 percent think that M&A activity will also stabilize or even pick up, a small sign of hope for the moribund tech industry.

"We see certainly an upturn, albeit from a pretty gloomy time," says Will Frame, a managing director with D&T's corporate finance services division. According to Frame, poll respondents say the hard, startup-killing, portfolio-management decisions have mostly been taken already, leaving VCs free to look to the future.

"The individual VCs say they are looking for new deals, and that's good news," Frame says.

Of course, the optical and storage segments have retained their afficionados, even through the overall decline in venture activity. While not at the pace of earlier boom levels, it's still not uncommon for $100 million deals to get done, like the recent rounds snared by Santera Systems Inc. and 3PARdata Inc. (see Investors Stand By Santera and 3PARdata Snags $100M).Optical stalwart Morgenthaler Ventures just closed a new $850 million fund, a third of which is earmarked for optical concerns (see Morgenthaler Doubles Down). And stealthy storage startups, like Intransa, are attracting old-line networking pros like Eric Benhamou (see Eric the Intransa Gent), along with their startup dough.

Indeed, some think the storage sector in particular may be heading toward overfunding (see Venture Capital Survey), like the optical systems and components fields before it. So, there's still some weeding out ahead before a new crop of startups can reach full bloom.

Though the D&T survey says that only 37 percent of the VC respondents expect further declines in exit valuations, 72 percent said that follow-on rounds are still likely to decline in the next half-year, with many more startups -- and even some VC firms -- falling by the wayside.

"I think you'll see some of the newer [VC] funds ceasing operations," says Frame. "Especially the ones who came into being the last few years, and not firms with a lengthy track record. We're seeing a return to some of the traditional VC values, helping to build long-term businesses, and generate real value for customers."

D&T surveyed 1,200 individual VCs on both the east and west U.S. coasts, between June 1 and July 31, with 200 respondents from Silicon Valley alone, according to Frame, who says a follow-up survey will be conducted in the fourth quarter.Paul Kapustka, Editor at Large, Byte and Switch http://www.byteandswitch.com