CLEAN TECH DRIVE: VCs hope for big successes in this industry, directed mostly at fighting climate change. But since it is not capital-efficient, VCs need to invest more to make it a success (Bloomberg)

If you talk to VCs or entrepreneurs in the US, or if you attend conferences on entrepreneurship, it is sometimes difficult to feel the world is in the throes of a recession. Mark Cannice, associate professor of entrepreneurship at the University of San Francisco, does a study of VC confidence every quarter here, based on what VCs think of the investment environment over the next 18 months. The index of this confidence has been steadily declining in the Valley for the past five quarters. It rose again for the first time in the first quarter of this year. He has also been tracking the VC confidence in China, where it did not drop in the previous quarter. Cannice has also found an interesting positive correlation between VC confidence and the IPO market. “There is now an expectation of a recovery in the venture environment,” says Cannice.

The recent news about the VC industry has been very bad. The amount of VC money invested in companies fell significantly in the first quarter of this year all over the world. In the US, it was down 47 per cent in the first quarter, according to the MoneyTree report from PriceWaterhouseCoopers (see ‘Hitting A New Low’ on page 30). VCs invested 50 per cent less in international markets (Europe, Israel, India and China) as well in the first quarter, according to Dow Jones VentureSource. In the Silicon Valley, the drop was 43 per cent, and that too because of a decline of 95 per cent in investments in clean tech. Entrepreneurs are, however, as active as ever. “Entrepreneurs are blind to economic conditions,” says Brent Ahrens, general partner at Canaan Partners. “You cannot stop them.” Many VCs too like investing during a recession. “It keeps the noise out of the system,” says Vish Mishra, venture director of Clearstone Venture Partners.

HEALTHCARE AND PHARMA PUSH: Always sunrise industries, healthcare and pharma continue to interest VCs. Healthcare reform in the US and declining drug pipelines of large companies will help start-ups develop new businesses

Consumer internet is attracting the attention of entrepreneurs and VCs for several reasons. It offers a myriad opportunities in terms of technologies and business models. It also provides the opportunity to be capital-efficient. So both the investments and exits in this space are marked by smaller deals — investments are less than $10 million, and exits usually less than $50 million and often less than $25 million. It also offers an entrepreneur the opportunity to exit even before a large VC investment.

Technology is still in a state of flux on the internet. Web 2.0 companies themselves are in their early stages, and many new start-ups are now transitioning to Web 3.0, and are at a stage known as Web 2.5. New search companies offer consumers and advertisers more focused content and services. And the mobile device, led by the iPhone, is providing a new medium for the advertisers. Not surprisingly, a report recently published by the Seattle-based investment bank Cascadia Capital identifies social media and mobile applications as the areas where entrepreneurs are most likely to make money.