Capital We've Got It's Companies We Need

TIM BAKER

November 11, 1991|By TIM BAKER

Since the duck-hunting season will soon open, it's time toblast away at that old canard about how Baltimore's mean-spirited venture-capital firms bankroll start-ups in Boston and northern California but won't invest in Maryland's own high-tech companies.

For example, earlier this year a local business school's survey piously reported that our venture firms have invested 90 percent of their capital out of state. Take New Enterprise Associates, Maryland's largest venture firm. It has made 175 investments, but only twelve of them in Maryland. Sounds terrible, doesn't it?

We're told over and over that these venture firms deprive local entrepreneurs of the capital needed to build this region's high-technology future. But it won't wash. Indeed, there are so many good angles from which to fire away at this theory that it's hard to know where to start shooting.

The theory rests on the assumption, usually tacit, that our venture-capital firms have exported to other states capital which they raised here in Maryland. In fact, Baltimore venture capitalists have never succeeded in raising much money around here. Most of their money has come from out-of-state investors.

For example, NEA's eight funds have raised $577 million since 1978. But only $17 million came from Maryland. On the other hand, those eight NEA funds have invested $32 million in Maryland companies. NEA's out-of-state limited partners have added another $25 million in direct co-investments. As a result of these leadership investments, these companies have now attracted more than $219 million in additional public equity funding.

NEA's experience is typical. Grotech Partners in Timonium raised $50 million from out-of-state institutional investors last year. So far it has invested $10 million. From that pool $6 million went into Maryland companies along with an additional $12 million in co-investments from out-of-state which Grotech arranged. Last month one of those companies generated another $15 million in public equity.

This year may represent a breakthrough year for venture-capital investment in this state. Since January, four venture-backed Maryland companies have successfully completed initial public stock offerings: Genetic Therapy, Medimmune, Integrated Health Services and Microprose. This is a major accomplishment. Add nine other new offerings in the rest of the mid-Atlantic area, and together they amount to a significant chunk of all the venture-backed initial offerings in the country this year -- more than the fabled entrepreneurs in Silicon Valley and the San Francisco Bay area.

The impact was evident at the Greater Baltimore Committee's Mid-Atlantic Venture Fair last month. For the first time senior partners from major national venture firms showed up to listen to the presentations. They'd heard the message. This region has begun to show that it can produce some high-growth companies!

That's the key. Venture capitalists don't invest in prize-winning scientific discoveries or even in ingenious new products. They invest in companies. They make money for their investors by buying stock in risky new enterprises. Some will fail, but a few will grow very rapidly and produce very large capital gains.

Venture capitalists have admired our outstanding scientific research institutions. But they have doubted this region's capacity to take commercializable innovations and build high-growth companies around them. This year that perception may be changing.

This year also marked the firm establishment of Maryland's seeventure-capital industry. Catalyst Ventures, the region's first seed fund, has made five of its nine investments in local companies: American Day Treatment Centers, Cellco, J.L. Wickham Co., Stuart Medical and Telogy Networks. Catalyst expects to invest in two or three more projects and to complete its $12 million portfolio next year.

Across town, Johns Hopkins solved some serious problems last month by merging its Triad Investors Corporation with Zero Stage Capital-Maryland. Several years ago Triad rejected the advice of successful venture capitalists and set up the wrong structure with the wrong strategy under the wrong management. As a result it couldn't raise enough money. In contrast, Zero Stage put together the right components, but as an unknown out-of-town outfit it couldn't convince enough local investors to back it.

The merger brilliantly corrected both sets of problems. The combination liberates Triad from the Dome Corporation and establishes it as an independent entity under the direction of Zero Stage's Barbara Plantholt, a savvy and experienced venture capitalist. With a combined total of $10 million in capital the merged entity looks viable. So far, it has invested $3 million in 14 seed opportunities, 12 of which are local. Ms. Plantholt now sets out to demonstrate nationally that she can expedite the commercialization of university technologies, build companies, and make money.

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