Recession, what recession? That's what it feels like in and around Silicon Valley. There is a lot of VC money being poured into startups so it feels as if we are recession proof, recession is what happens on the TV, somewhere else and not here.

That's what it might feel like but that's not what is potentially lurking below the surface. In conversations with local entreprenuers I'm hearing more stories about funding problems because of the recession, the real estate market slump, and the investment banking crisis.

In one story, a startup that had $7m in funding promised by large angels (arch-angels) lost much of it because the investors had lost money in real estate. Also, some angel investors have lost money because of Bear Stearns and now have less to to fund startups.

Angels gone?

The loss of the angel investors is potentially a big problem because Silicon Valley VC firms have outsourced much of the seed investing to the angels. The angel investors are a more important generator of the next wave of startups now than ever before, this could hurt Silicon Valley. [Please see: Jeff Clavier.]

I was at Lunch 2.0 at Ogilvy PR on Tuesday and I ran into James Hong, one of the founders of Hot or Not, a tremendously succesful web site. Hot or Not was sold in February to private equity firm Avid Life Media, for a reported $20m. He said fears of the recession were the prime reason Hot or Not was sold. "I'm telling all my friends to either get out now or buckle up for the long term."

"I'm not going to plan my next venture until it is clear what is going on with the economy," he said. I pointed out that Silicon Valley always produces its best ventures in a recession, Hot or Not came out of the recession. He nodded but said that with a new venture it is important to know how the economy will play out.

Jeff Nolan, a former venture capitalist and now at Newsgator, said that a lot of money moved away from VC funds and into hedge funds. Now, the large institional investors will be rebalancing their portfolios and more money will come into VC funds.

James Fisher, a local entrepreneur says that M&A in the valley is going to be disrupted by the turmoil in the investment banking sector. Investment Banking Crisis Will Freeze Silicon Valley M&A Deals