Venture capitalists have resurfaced with renewed optimism on the growing wave of economic recovery after years of disillusionment. They are also much wiser for the wear to the point of almost being too cautious when it comes to making investments.

"A lot of venture capitalists that I know have not done deals for two to three years," Martin Gagen Director of the Board, 3i Group, told the audience during his luncheon presentation at the Venture Capital/Private Equity Partnership Conference on September 22. "That might be a good thing if they are doing so because they feel there is nothing worth investing in. But there is a danger that companies are becoming gun-shy after big losses during the dot-com bubble."

He estimates that investments in companies in the United States have fallen to about one-fifth of the rate from a few years ago. Part of the reason for the plunge is that investors have "had a hell of a shock to the system. As a result, U.S. investors are now very inward looking," he added.

He predicts their retraction from the global industry will open up more opportunities for investors with a global vision and network. "As a result, there has never been a better time to invest," he said.

A recent survey by Dibb Lupton Alsop shows that investor sentiment for the remainder of the year and into the first half of 2004 is very optimistic. Some 75 percent of venture capitalists polled in the Greater China region think the region will pick up towards the end of the year, while 63 percent believe that the market for IPOs will improve in the coming year.

Respondents overwhelmingly indicated that China remains is most popular destination for investment focus, with 97 percent of investors indicating their interest in the Mainland, with Shanghai (79 percent) Beijing (70 percent) and Guangzhou (61 percent) being the top three venture capital investment destinations.

Despite their bullishness on the China market, the main message echoing throughout the day-long conference was the issue of corporate governance and the need for greater transparency.

Secretary for Financial Services and the Treasury, Frederick Ma, in his remarks at the conference, said the government has been taking a series of initiatives to upgrade the corporate governance of listed companies and the quality of Hong Kong's equity market.

"Together with the SFC and HKEx, we have drawn up a Corporate Governance Action Plan early this year. Consultations have just been completed or are being conducted on a number of proposals, notably the tightening of the regulation of IPO intermediaries and a series of recommendations put forward in the Corporate Governance Review Phase II Report of the Standing Committee on Company Law Reform. We will also consult the public shortly on how to enhance the listing regime and to provide statutory backing to listing rules," he said.

However, some members of the audience questioned the need for even stricter regulations, and argued that better enforcement of existing regulations would be more effective that simply adding more layers of red tape.

Herbert Hui, Chairman, The Hong Kong institute of Directors, said an increase in the number of breaches of the rules is not indicative of success of the Securities and Futures ordinance. Its success hinges upon the awareness and acceptance of the regulations and the need for corporate governance development within the business community.

An interesting aspect of this year's conference was that some companies who had found backing from venture capitalists shared their experiences with the audience. Yat Siu, CEO of Outblaze, said it wasn't always smooth sailing with his venture capitalists. As speakers had stressed during their talks at the conference, open communication was very important in avoiding and solving problems, but occasionally, investors over-reacted to negative news.

"When you have problems, you need to have a unified house," he explained. "When the market went sour, outside shareholders were exerting pressure on the company, which led to problems internally."

What his investors failed to realise, he believes, was that because Outblaze was a small company, it didn't have the resources or expertise to produce all the reports that the venture capitalists wanted.

"So for the first year we were looking far too much inside the company to keep investors happy, instead of looking how we could grow the business and expand sales," he said.

Frank Lai, CFO, Central Semiconductor Manufacturing Corporation, in sharing his experience, said that initially investors were very supportive and willing to share their expertise, which benefited the company tremendously.

"During the first six months they love you and call you every week and want to meet you every month," he said. "Suddenly, after four months, they have other projects going on so they lose interest in you. So the trick is to keep their interest in your company so that you can use their expertise."

Keeping their interest and being very transparent in sharing with investors not only the good news but also the bad, paid off for the company during the very difficult SARS crisis, he said.

He found that investors are also demanding more details about what is going on in a company. Venture capitalists are no longer happy to receive a monthly financial report, and take the CFO at this word.