Region lures more venture capital Maryland, Virginia benefit from thriving market, entrepreneurs

Investing

September 04, 1997|By Jay Hancock | Jay Hancock,SUN STAFF

Venture capital continues to flow along the mid-Atlantic coast, as the economy swells and investors infuse dozens of infant and toddler companies with money and energy.

Both Maryland and Virginia booked healthy increases in venture-capital placements during the first half of this year, according to a new survey by Coopers & Lybrand, an accounting and consulting firm.

In Maryland, venture capitalists invested $59 million in 14 companies, up from $47 million and 12 companies during the first half of 1996. For Virginia, venture capital deals grew from 19 to 29, and invested funds expanded from $80 million to $110 million.

"We are very, very busy," said Stuart Frankel, managing director of Grotech Capital Group, a Timonium venture firm that is preparing to launch a $250 million fund next year, its biggest yet. "The deal flow here is just incredible. We've been able to attract really great capital worldwide."

With an eye to eventually selling out to public stock markets or other buyers, venture pros invest in small, often high-tech, companies with huge growth potential.

Analysts credit this year's continuing surge in venture deals to a booming stock market, a long menu of promising technology and a teeming entrepreneurial class populated partly by managers leaving big companies in recent years.

"We're seeing, I think, a cultural shift in multiple regions throughout the country," said Peter Barris, general partner with New Enterprise Associates, an important, Baltimore-based venture firm.

"Small-company, entrepreneurial environments are becoming desirable places to work," he said.

"We've seen major corporate executives make the leap from their secure, heavily perked environments to entrepreneurial environments where you're betting on the come, but the payoff can be substantial."

The soaring stock market has impelled venture deals from two directions. Rich returns harvested by venture pros cashing out to public stock investors have excited interest from people who before hadn't gone into venture deals. At the same time, high stock values have helped top off the country's general supply of capital.

Calif., Mass. lead

"You might find a state pension fund that wasn't really a player in venture capital saying, 'You know, we really ought to put 3 percent of our assets in venture capital,' " Barris said.

Compared with traditional venture-capital strongholds, mid-Atlantic venture action is still middling. For example, California, epicenter of the computer industry, recorded $1.91 billion in venture deals from January through June, according to the Coopers & Lybrand report. (A separate, Price Waterhouse survey put California's first-half venture investment at $2.07 billion.) Massachusetts, the No. 2 state, had $598 million, Coopers said.

But "excluding the Bay Area and excluding Massachusetts, which are always hotbeds of venture-capital activity, I would say the overall atmosphere here in the greater Washington area is extremely positive," said Jim LaTorre, partner and high-technology practice leader with Coopers & Lybrand in Northern Virginia.

Virginia ranked 14th among states for venture deal valuation in the first half; Maryland, 22nd.

In a separate survey by Price Waterhouse, the value of venture capital deals in the region from Virginia to New York increased by 21 percent to $903 million.

Venture investments here are rising this year even though biotechnology -- perhaps Maryland's brightest high-tech hope --

is out of favor at the moment. Venture players are focusing more on communications, computers, medical hardware and health-care management.

3 Maryland companies

With bioengineered medicines taking longer to get to market than anticipated, "we're getting more picky about biotech because it takes so much money it's almost not a venture game anymore," said Nora Zeitz, a partner at New Enterprise. "We love communications and Internet infrastructure."

Maryland companies receiving venture funding recently include PathNet, Pioneer Eye Care and Crown Simplimatic.

PathNet intends to package underused microwave transmission capacity owned by utilities, railroads and governments and sell it to telecommunications companies. Pioneer is a managed-care concern, similar to a health maintenance organization, focused on ophthalmology and optometry. Crown Simplimatic, formerly part of Crown Cork & Seal, makes machines for putting beverages in containers.

Internet content providers -- the people who create the material you see and use on the World Wide Web -- have lost favor among investors recently to Internet "infrastructure" companies providing software and hardware for the information freeway.

But "at the end of the day, it is content that is going to drive the usage of the Internet, and the savvy venture capitalist who can kind of choose who is going to be the survivor in the content game is going to reap substantial benefits," LaTorre said.

While they're a boon to entrepreneurs, flush stock markets and venture pools have worked against venture investment firms. With more money chasing deals, entrepreneurs can hold out for better bargains from potential benefactors, selling a smaller piece of a firm, for example, or demanding a higher price.

Taking shortcut

And public stock markets are sufficiently hot enough that growing companies that once would have sought another round of venture financing are taking a shortcut straight to initial public offerings.

"If anything, the quality deals are getting funded at relatively high prices, based on historic comparisons," Barris said. "The jury is still out on what that means.

"I've definitely seen more quality deals by far in the mid-Atlantic area. I've heard people complain that, gee, there's not a lot of venture capital firms, not a lot of capital in the region. I just have a hard time buying that. Quality deals will get funded."

Pub Date: 9/04/97

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