Even VCs are balking at Silicon Valley's cost of living

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Credit: Per Palmkvist Knudsen

A recent report on the state of venture capitalist confidence shows growing worries about the cost of living in the Bay Area

How bad is the tech-bubble-inflated cost of living in Silicon Valley? Bad enough that even the VCs are getting nervous.

In the latest edition of the Silicon Valley Venture Capitalist Confidence Index, a quarterly survey of Bay Area VCs conducted for more than 10 years running and authored by University of San Francisco School of Management Professor Mark Cannice, VCs have expressed declining confidence about the area's "high-growth venture entrepreneurial environment" for the fourth straight quarter.

Costs up, confidence down

The current score, 3.73 on a scale of 1 to 5, is down from the previous quarter's score of 3.81, and further down from its record high of 4.5 in Q1 2007.

Based on feedback from the investors polled, a fair amount of jitters revolve around the exploding costs associated with setting up business and retaining employees in the Valley:

  • Bob Bozeman, Eastlake Ventures: "... talent competition and costs for doing business in Silicon Valley are continuing to push up the amount of investment required to successfully compete in Silicon Valley."
  • Bob Ackerman, Allegis Capital: " ... all aspects of the costs of doing business for venture companies gives reason for substantial pause. Expectations are beginning to outpace reality."
  • Dag Syrrist, Vision Capital: " ... I for one would have predicted this cycle to have turned by now especially as existence cost in the Bay Area is making it fantastically expensive to hire and retain folks."
  • Anonymous: "The overall environment for innovation and growth remains positive -- with downsides being the high cost of doing business in the Bay Area ... "

Other macroeconomic risks cited included the Fed raising interest rates, the value of outfits receiving late-stage private equity, and problems with the euro and China's stock market. But San Francisco-area real estate and costs of living were singled out time and again as issues.

More at stake than before

Despite these concerns, the amount of money sloshing around in the Bay Area VC market also continues to go up. A recent Mattermark funding study showed how startup capital has almost doubled since this time last year, with overall totals for U.S. startup funding fast on their way to meeting or exceeding the highs of 2000.

Also changing: Where VC money is going. Mattermark found that compared to last year, Round A and B funding have both jumped -- but the biggest leaps are in Round C and late-stage offerings. In other words, more of the new money in the Valley is going toward propping up or expanding existing ventures, not kicking off new ones.

Another observed change, as reported by Paul Holland of Foundation Capital, is the source of the money. "Upstream sources of funding (endowments, pensions, etc.)," he stated in the survey summary, "are flowing into large-scale private companies at a record pace, providing ample resources for growth and product line as well as geographic extensions."

If the jitters over costs reached the point where VC money for the Valley dried up, its affect on the local job or real estate markets would be bad enough. But it might affect even stable, established players in the same space.

Investor Bill Gurley (who supported Uber and Snapchat) believes the bursting of such a bubble could affect companies "whose revenue is increasingly reliant on spending by venture-backed startups." A major example he cited was Facebook, which receives a goodly amount of cash from startups promoting downloads of their apps on the platform.

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