Venture investors capitalize on growth Seed money: The venture capital business is the engine that drives the economy's growth sectors.

November 10, 1995|By Timothy J. Mullaney | Timothy J. Mullaney,SUN STAFF

Clyde Heintzelman and Allen Shatto are both looking for venture capital to feed their growing companies. But the way they look at the venture market -- and the way the people who provide seed money critical to young firms look at them -- could hardly be more different.

Mr. Heintzelman, chief operating officer of the Beltsville-based Internet access provider Digital Express Group Inc., is sitting pretty. His company raised $5 million of venture money in March, and its backers are ready to pour in more.

Mr. Shatto has a different story, even though his A&L Shatto Inc. of Bel Air is Maryland's fifth-fastest-growing technology company, according to the Greater Baltimore Committee's "Fast list, which was released last month. He said he sent out

proposals to 25 firms, trying to raise $500,000 in growth capital, and only two even responded.

"We aren't finding anyone beating a path to our doorstep," said Mr. Shatto, whose company investigates whether clients' manufacturing processes meet environmental and workplace safety laws. "I think we're still too small."

That's the way things are in the venture business, a notoriously cyclical -- but utterly vital -- engine of the high-growth and high-technology sectors of the economy. A new survey by the San Francisco firm VentureOne Corp. shows there was a record amount of venture capital available in the second quarter of 1995, and a record number of venture deals were completed. The seed-money business blows hot and cold, and for now the furnace is on.

"We're probably in for a 20 to 25 percent increase nationally in venture activity for the year," said Rolf Selvig, marketing director of VentureOne, which predicted venture capitalists could invest $6 billion in 1995. "There's plenty of venture capital money for companies that can provide technology that is unique, that they can defend with a patent, and that are pursuing something that has a market."

Plenty of money indeed. Venture investors sank $3.2 billion into companies in the first half of 1995, up from $2.6 billion in early 1994, VentureOne said.

There is one downside: So much money is available that venture capitalists are looking for bigger deals as the demands for their time and money increase. That adds a new hurdle for small, early-stage companies, such as Mr. Shatto's, that often have a hard time finding money anyway.

The trend "is going to pre-empt you from doing lots of $200,000 investments in a lot of garages," Mr. Selvig said. "But there are venture guys who do that."

Good returns

The reason for all this venture activity is pretty simple: The people who have put money into venture pools the last few years have made out like bandits. Venture funds made an average return of 35.5 percent, after management fees and expenses, between June 1994 and last June, said Jesse Reyes, managing director of Venture Economics Information Services in Boston. The Standard & Poor's 500-stock index made 22.6 percent before expenses.

"Fund raising [by venture firms] is lower than this time last year, but it's still a fairly healthy sum," Mr. Reyes said. "There was a lot of acceleration in fund raising last year."

Local venture firms such as Grotech Capital Group Inc. of Timonium have exploited the trend to raise big pools of money for investment. Grotech raised a $126 million fund last year and has invested in 13 deals since last October.

The Baltimore-Washington corridor is roughly tied with greater New York as the nation's third-most-active market for venture capital, behind Northern California and metropolitan Boston. According to the accounting firm of Coopers & Lybrand LLP, $177 million of venture money was invested in Maryland, Washington and Virginia companies in the first half of 1995.

Sixty percent of the local money went to communications and health care firms, but only 6 percent to a biotech sector, the appeal of which has waned as inventing new drugs proves harder and more time-consuming than many early investors anticipated.

"The economy is good but not overheated, and interest rates have remained stable," said Stuart D. Frankel, managing director of Grotech. "And there's this hot sector -- anything connected with the Internet is very hot."

Winning big

The premise of venture investing is that the firms place large numbers of relatively small bets on companies and their technologies. The point is to win big enough on the winning bets, usually when a company makes an initial public stock offering or is sold to a larger competitor, so that investments in companies that struggle or fail are forgotten. No one expects to bat 1.000 -- and you don't have to in order to make money.

Lately, the market forces venture capitalists need to make big scores and cover small mistakes are firmly in place. Mr. Reyes said 65 venture-backed companies raised $2.4 billion in IPOs during the first half of 1995.

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