KPMG survey finds optimism in Philadelphia's venture community

Last year around this time, those connected with the Philadelphia area's venture capital industry were worried along with the rest of us.

Markets were falling. The federal government was rescuing major financial institutions. The economy was teetering.

KPMG L.L.P., which conducts a survey with the annual Mid-Atlantic Capital Conference in Philadelphia, found a very dark mood. Venture firms, which always want to fund the growth and expansion of new companies, were instead planning to cut costs at those companies, said Brian Hughes, a KPMG partner based in Philadelphia.

Just as two straight quarters of positive gross domestic product growth in 2009 have indicated contraction has ended, so too this year's KPMG survey shows a brighter outlook by the venture capital world.

The survey of about 300 Philadelphia-area venture capitalists, entrepreneurs and professional advisors found that 87 percent of respondents expect total venture capital investment to increase in 2010, up from 32 percent last year.

For the second straight year, the No. 1 industry sector to put money to work is expected to be "cleantech," which encompasses companies involved in areas such as energy efficiency and alternative fuels. Perhaps that should come as no surprise because that's an emphasis of the Obama administration's economic stimulus effort as well.

Venture firms are profit-making enterprises out to put their money to work in what they hope will be fast-growing businesses. They raise money mainly from institutional investors, such as pension funds and endowments.

While everyone loves a good success story of venture-backed home runs like Google, eBay and even Staples, more common are the singles and doubles - companies that may get acquired or go public but never reach household-name status.

In fact, that's how venture firms make money for their limited partners. They have to "exit" with an initial public offering or engineer the sale of an investment. And that's been a problem for nearly two years.

Mark G. Heesen, president of the National Venture Capital Association, said last week that he's very concerned about the state of the industry. A shakeup has been underway as those venture firms that were formed during the dot-com bubble era are reaching a point in their development where they need to be finding ways to return capital to their limited partners.

A healthy equity market produces 85 to 100 IPOs a year, according to Heesen. Only six venture-backed companies went public in 2008, and there've been just 10 venture-backed IPOs so far this year.

The KPMG survey asked about the barriers to going public, and Hughes said the biggest hurdle is lack of investor appetite for IPOs. With the M&A activity beginning to pick up, that alternative has been more attractive to venture firms.

Still 88 percent of those surveyed predict GDP growth of between 0 and 5 percent in 2010, compared with the negative GDP predictions of last year, said Hughes, who is co-leader of KPMG's venture capital practice.

Meanwhile, 53 percent of the respondents are now looking to inject new capital into companies as they begin to hire and plan for expansion in 2010, Hughes said.

After a year of watching business run for cover, consider these signs that 2010 may be a little better those trying to build and grow companies.