The economy continues to be the number one concern of Washington's venture capitalist community, according to the Washington Technology Industry Association’s Q3 2010 Venture Capital Outlook Survey.

With the slowdown in the economic recovery, the majority of venture capitalists have predicted that the quality of new deal flow, the quality of deals expected to close, their confidence in the quantity of deal flow, and valuations for new early-stage deals will remain the same as Q2.

Cautious optimism may be indicated by improvements in the predictions of moderate revenue growth and the absence of layoffs. For the first time since 2009 firms are predicting that they will be making C-round investments, which may indicate growing confidence in companies that have weathered the economic storm thus far.

"Despite uncertainty in the economy right now, venture capitalists' expectations are holding steady for Q3," says Susan Sigl, president and chief executive of the WTIA. "The overall outlook is positive for moderate revenue growth, but as some of the steam has gone out of the recovery it's clear that venture capitalists are expecting their portfolio companies to keep a tight lid on costs, which is reflected in the hiring predictions. The small move toward later stage investing is certainly welcome news to start-ups that have kept themselves afloat during the recession and may be in need of a capital infusion."

The survey shows that no portfolio companies are predicting layoffs, despite a hold in hiring. Eighty-eight per cent of participants predict portfolio companies' workforces will remain level during the quarter. Twelve per cent of participants were not sure, and none were predicting layoffs.

While 71 percent of venture capitalists expect to invest in series A funding rounds, this is the first quarter since Q3 2009 that venture capitalists predict investing in C rounds. Twenty-eight per cent of respondents predicted Q3 investments split evenly between B and C rounds.

No venture capitalist predicted substantially better revenue growth for Q3 compared to 13 per cent last quarter. However, 88 per cent of venture capitalists predict moderately better growth among portfolio companies in Q3 compared to 63 percent in Q2. Twenty-two percent predict revenue will remain the same in Q3.

Eighty-six percent of venture capitalists plan to co-invest with firms from outside of Washington State and all survey participants plan on co-investing with in-state firms.

Seventy-one per cent of venture capitalists anticipate a portfolio company acquisition in Q3 compared to 13 per cent last quarter.

"I think investors are still worried about macro factors like unemployment, health care costs, and upcoming tax increases," says Greg Gottesman, managing director at Madrona Venture Group. "That said, there are a lot of reasons to be optimistic. Enterprise IT spending is up, mobile is taking off, and entrepreneurs are starting really interesting businesses. We expect Q3 to be a positive quarter for most companies and more M&A activity than we have seen in a long while."