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PhillyInc: Venture capital still on the upswing

By and large, entrepreneurs and venture capitalists are fonts of eternal optimism.

You can understand that because both groups firmly believe there is no problem that can't be solved. And exploiting new technology is generally the way they solve those problems.

So if you get a bunch of investors and start-ups together in the same room in Philadelphia and survey them, as KPMG L.L.P. did last week, then you're likely to hear that things can only be getting better and better.

This is the fourth year that KPMG has surveyed the annual conference, known this year as Impact 2011, presented by the Greater Philadelphia Alliance for Capital and Technologies.

More than 270 area venture professionals, entrepreneurs, lawyers, accountants and other advisers were asked about their plans and economic outlook for the next two years.

To measure whether growth companies were in fact living up to their name, KPMG asked if they were raising additional capital or planning for additional growth. In response, 36 percent said they were raising money and 41 percent were planning to expand.

The audit, tax and advisory firm adds those two percentages together to produce a "pro-growth" total of 77 percent. Last year, the same question produced a total of 68 percent.

To me, actions always speak louder than words, and KPMG partner Brian Hughes had an answer for my skepticism. In addition to asking about the future, the firm asked how many companies had increased headcount in the last year. The answer was 62 percent.

Looking ahead, 79 percent of these small companies expect to increase hiring in 2012 - of those, 48 percent predict boosting headcount by more than 10 percent.

Now, that's optimistic but not outlandish for companies that are often described as "gazelles" - small, nimble enterprises that move quickly and feed on free-range venture capital.

One worrisome trend I detected in the responses was where venture professionals expect to put their money to work next year.

Life sciences, which is very capital-intensive and a key industry in the Philadelphia region, has slipped considerably in popularity, with just 9 percent of venture capitalists intending to pursue investments there.

One big head wind facing life sciences is that the valuations of the companies that have gone public or been acquired recently have been not what their once-patient investors expected. That tends to temper enthusiasm for any industry sector, said Hughes, who is co-leader of KPMG's venture capital practice in Philadelphia.

What is hot now are entrepreneurs focused on pushing technology and services over mobile devices, such as smartphones and tablets. Such mobile companies are what 34 percent of the VCs surveyed identified as the most attractive investment opportunity.

Next most popular was "cloud computing," which involves businesses accessing data and software tools on rented remote servers rather than buying their own hardware and software. Twenty-eight percent of the venture capital rainmakers expect to seed cloud and "software-as-a-service" companies next year.

Last year's survey showed "clean tech" to be the hottest sector. This year, the category that includes alternative fuels, clean water and energy efficiency was cited by 16 percent of survey respondents as where they hope to clean up.

Hughes assured me that the venture community is not all Solyndra'ed out (although capital-guzzling solar is in disfavor). Clean-tech firms address big problems, and investors hope the payoff one day will be equally big.

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Media Contact:

Kristen Fitch

Kristen Fitch

Senior Director, Marketing