In the deep mid winter?

At the Asian Venture Forum hope springs eternal. Some 300 delegates attended the first day to hear what the leading lights of the Asian venture capital (VC) world thought of the present and future. Worries about the present state of the market were mixed with hopes for the future. The bruises of the recent past were all too obvious for everyone. But, as ever, when groups of investors get together and talk about Asia, the big picture is rosy but the devil lies in the details.

Nevertheless, delegates were pleased to be in Asia and not in the US. "In Asia there's a lot of money waiting on the sidelines and there's very little excess start up inventory that there is in the US. Things are a bit brighter in Asia [than in the US]" said Lip-Bu Tan, Chairman of Walden International.

Ta-Lin Hsu, Chairman and CEO of H&Q Asia Pacific, noted that although Asian economies were in trouble, the region's strategic position as the world's manufacturing hub would ensure its continuing relevance for investors. Moreover, while the region was suffering from the global tech downturn, Asia had not risen as high as the US and so consequently there was not as much VC blood on the street as there is in the US.

Even still, there are many structural problems with the Asian VC markets. Revenues in investee companies are not very visible. There is a low revenue ramp. Everyone is trying to reduce expenses resulting in lay offs and write-offs. The IPO market is shut and raising new money for new funds is difficult. Consolidation and contraction define the market. As a result of all this, and most importantly, returns for investors are poor.

Yet opportunities do exist. In broad brush strokes, speakers at the conference saw the opening and continued growth of China as perhaps the most exciting opportunity. Restructuring Japan was also a common theme of interest. And while smaller, technology-driven deals out of Taiwan and Korea will continue, ASEAN does not seem to be on the VC radar this year.

Most interesting was what the speakers had to say about exit strategies and management. The lack of both prevent the VC market from living up to its full potential in the region. Many would argue that Asia is poorly served by its capital markets, where structural inadequacies mean that capital does not easily find its way to good small and medium sized companies. As a result, an efficient, large and liquid private equity market would seem to be a necessity, as well as good investment.

Yet structural impediments abound. Exit strategies are not nearly as clear cut as in the US or Europe where the aim is to go to the stock market with a large IPO, at a high P/E and sell into a liquid, rising market. In Asia, the markets are too small and illiquid for most exit strategies. Asian VCs have to be more creative when it comes to leaving their investments. Trade sales appear to be the preferred route among speakers at the conference, and given the region's on going M&A surge, this looks likely to continue.

The one country where VCs see scope for IPO exits is in the domestic Chinese markets. Reform of the domestic markets in China is predicted to provide huge opportunities for VCs to exit young Chinese companies by selling to domestic investors. The merging of A and B shares as well as the huge liquidity in the market will provide a very effective market place for foreign funded Chinese companies to list. The mouth watering P/Es Chinese investors afford their stocks was obviously another huge draw.

When it comes to managing investee companies, Asia again comes up short. There are no shortage of entrepreneurs with bright ideas for start up companies. But according to the speakers, a lack of middle to senior managers in areas such as sales and marketing are a serious impediment to companies achieving the high rates of growth that VCs demand. This is exacerbated in two common types of Asian company - the family-controlled company and the government spin off - where bright, entrepreneurial middle managers are frowned upon.

The theme of the conference was "Everything old is new again". And many speakers suggested that the VC market was looking very similar to how it did during the crisis years of 1997-1998. This was despite the huge shifts that had taken place during the dotcom years.

"We have come down from the cannabis highs of 1999-2000," said Gary Lawrence, managing partner of Capital Z Asia Partners. "There has been a shift of attention back to traditional old economy companies. We are very much back to where we were in 1997-1998."

Governments are struggling with their own finances and the pace of reform. NPLs are rising, bank finance is not forthcoming and companies are postponing deals. "It's easy to be cynical," admitted Lawrence. Yet there are deals that have closed, and positive undercurrents have emerged. Full control acquisitions have increased. Board participation is now common and increased opportunities present themselves to invest in established business. According to Lawrence, this is likely to continue without any spectacular deviation.

Overall, the mood at the conference was rather like that of a Monday morning in the office. The hangover from the Saturday night dotcom party has passed and the prospect of a lot of hard work looms. Exits seem far off and everyone realizes that the real work of finding companies and working out a strategy has to begin anew. "The challenge for the next six to nine months is to take advantage of opportunities without catching any falling knives," said Lawrence.

Or, as a rather more up beat Tan from Walden concluded: "this is the worst time to be raising money. But if you have the patience, this is the best time to build a great company."