HispanicBusiness

The recession has devastated the U.S. economy, but a new report that gauges the confidence of venture capitalists suggests that the situation is improving and there may be good reason to begin investing again soon in small businesses.

A March 2009 Silicon Valley Venture Capitalist Confidence Index survey of 30 San Francisco Bay Area venture capitalists released today broke a five-quarter downward spiral of plummeting confidence. On a scale of one to five, the venture capitalists registered 3.03 -- up from last quarter's five-year-low of 2.77.

"The mustard seed of hope appears to be taking sprout among a majority of venture capitalist respondents," said report author Mark V. Cannice, an associate professor of Entrepreneurship with the University of San Francisco School of Business and Executive Director and Founder of the USF Entrepreneurship Program.

" . . . This hope is leading to a more optimistic climate and new investments, with numerous venture capitalists believing that great companies tend to be launched in difficult economic environments."

While the Bay Area is famous for its plethora of successful startup tech companies built on the backs of the venture capitalists, recent months have seen a massive slowdown in investments. Venture capitalists have fled California and the country in droves, opting to invest in less risky markets overseas in China and India, resulting in a loss of billions of dollars to the U.S. economy.

Venture capitalists, however, believe the market is beginning to stabilize.

"There are signs that the economy is trying to overcome uncertainty," said Debra Beresini, co-founder of Invencor in Menlo Park. "There are signs that the stock market is trying to avoid its recent roller coaster ride. There are signs that house sales have increased given lower interest rates, reduced prices and economic incentives. And there are signs that venture firms are beginning to invest again."

Much of the resurgence in confidence is in narrow niche markets, such as green tech and renewable energy products such as solar and alternative fuels.

"The clean tech sector continues to be one of the few bright spots in venture capital for early stage investors," said Bryant Tong, managing director of Nth Power in San Francisco. "With billions of government money targeted in this area, research and development will be robust and new and promising technologies will be the result."

The recession oddly enough may actually spark a new generation of business leaders and entrepreneurs. Despite the instability of the economy, entrepreneurs tend to rise aggressively out of difficult financial times. Known as "forced entrepreneurship" "a new wave of business leaders and models are likely to emerge, the report states, as they have departed corporate America.

Still, not everyone is convinced.

Steve Carnevale, a venture capitalist at Point Cypress Ventures in San Francisco, said even as there are signs of hope, the venture capital market is likely to get turned on its head by the time the recession is over.

Smaller and medium-sized companies stand to benefit.

"The venture capital industry is in crisis and risks systematic collapse like other segments of the financial industry," Carnevale said.

Successful venture companies will have to scale back their goals, he said.

"The vast majority of venture firms will go back to smaller early stage deals," Carnevale said. "Rather than investing tens of millions of dollars to create a billion dollar company, venture firms will invest a few million dollars to create a hundred million dollar business."

The report's author Cannice said it is still unclear whether the venture firms' increased confidence will result in a spurt of initial public offerings, which have all but disappeared in the last year.

"The rise in confidence among Silicon Valley capitalists in Q1 after five quarterly declines provides a sign of hope that recovery is a matter of 'when,' rather than 'if.' As the rise in confidence translates to further investment, the emergence of new, world class firms is bound to follow."