Venture capitalists expect the U.S. recession and unstable markets to slow investment and fundraising opportunities, however China, India, greentech, internet services and biotech will continue to gain momentum and investment in the coming year, according to a recent survey by the U.S. audit, tax and advisory firm KPMG LLP.

In polling 201 venture capitalists, corporate buyers, and investment bankers, KPMG found that 69 percent of respondents believe the U.S. is in a recession - 47 percent indicated they believe it is a mild, short recession while 12 percent expect the recession to be severe and extended. Seventy-four percent believe the stock markets will stabilize within a year, but the remaining 26 percent expect an extended unstable market environment. These current economic conditions are expected to take their toll on venture capital activity in the coming year.

Compared to the nearly $30 billion in U.S. venture investment in 2007, some 49 percent of those surveyed said the current economic conditions will lead to decreased investment activity in 2008, with 19 percent expecting a reduction of more than 10 percent. Similarly, 49 percent said market and economic instability will also lead to decreased fundraising opportunities for the remainder of the year. KPMG conducted the survey in conjunction with AlwaysOn, the venture capital new media organization.

"Given the state of the economy venture capitalists are signalling some caution in terms of their investment approach," said Brian Hughes, KPMG partner based in Philadelphia and co-leader of its venture capital practice. "But they are indicating that though overall investment may decrease, there will still be demand for investments in certain geographies and industry sectors that project the most growth in the near future."

Investing & Fundraising

Despite the cautious view on overall venture capital investment activity, KPMG found that greentech, internet services and biotech remain the focus of the VC community and will continue to see increased investment.

In fact, when asked which sectors would see the largest percentage of their available funds, 73 percent indicated technology and internet services, 11 percent said greentech, and seven percent said biotech. In addition, 69 percent said greentech investment will increase, 47 percent internet services investment will increase, and 42 percent said biotech investment will go up. However, 55 percent of respondents indicated that obtaining seed money would be more challenging for entrepreneurs.

With regard to where the money will flow geographically outside the U.S., KPMG found that 69 percent say China will continue to see the lion share of U.S. investment dollars followed by India (20 percent), Western Europe (7 percent) and Israel (3 percent).

"There is a clear indication that growth investors have become more global, spreading their capital worldwide," said Packy Kelly, KPMG partner based in Silicon Valley and co-leader of its venture capital practice. "Not surprisingly, they continue to be bullish on emerging markets."

While venture capitalists will face a more challenging fund raising climate, when asked where the most new fundraising opportunities would come from 63 percent say the U.S. followed by China (22 percent), India (9 percent), Western Europe (6 percent) and Latin America (3 percent). When asked who they were tapping for investment funds, pension funds (46 percent) and endowments (21 percent) were the most common sources for funding.