Investments in firms pay off for state Program aims to draw and nurture promising high-tech start-ups

Job creation one of goals

$5.25 million stake in 17 firms now worth $12.2 million, up 132%

Venture capital

October 26, 1997|By Mark Guidera | Mark Guidera,SUN STAFF

When Scott Stouffer and Robert Troutman asked state officials in 1994 to make a $250,000 investment in their young computer networking company, Visual Networks Inc., the venture wasn't exactly a riveting success story.

The Rockville company had no sales and its key product -- a computerized system to track and manage the vast bits of data that move rapidly across wide-area networks, like the Internet -- was still in development.

But state economic development officials were confident the investment would be well-placed, and gave the promising high-tech start-up a boost at a critical juncture.

"It was quite a bit of risk-taking on the part of the state," said Troutman, Visual Networks senior vice president. "We, of course, were very pleased."

The risk has paid off even better than state officials anticipated.

The investment, made under a four-year-old state financing program aimed at nurturing promising high-technology companies in Maryland, is worth $5 million today, based on the privately-held company's recent $100 million valuation in a third round of private financing.

The Maryland Enterprise Investment Fund has compiled an enviable track record in its short life. Only one of the investments made since the fund was launched in early 1993 has lost value.

According to the state Department of Business and Economic Development, which manages the program, the $5.25 million that the fund has invested in companies is worth $12.2 million today -- a 132 percent return. That figure is based on the most recent valuations, made in late June, of the 17 companies funded.

Even successful venture capital investors, who make a living leveraging risk, can't claim that type of return. According to Venture Economics Information Services of Newark, N.J., the venture capital industry as a whole posts an average annual compound return of 14 percent.

Under Maryland's program, any money the state makes on the deals (it hasn't cashed in on any thus far) is returned to the enterprise fund for new investments.

As successful as Maryland's program is, it is not unusual.

According to the the Corporation for Enterprise Development (CED), a Washington-based public policy organization, many states have similar programs to nurture industries seen as key to the area's economy. For example, Washington state has an investment program to assist in the conversion of timber industry technologies to other uses.

How the programs stack up in terms of job creation and other criteria when compared to one another is not clear, however, because they haven't been well studied, said Daphne Clones, a senior policy analyst with CED. But one consideration that is known -- the amount of money state programs will invest in

emerging companies -- puts Maryland at the top, said Clones.

Maryland officials attribute the program's success thus far to several factors.

A key one: Scrutiny of companies is tough.

For every deal the state strikes, about 30 others are turned away, said Daniel P. Healey, associate director of DBED's Investment Financing Group.

A crucial element that state officials look for in their review: Companies must have significant venture capital backing and their technology has to be marketable -- not just remarkable.

The venture capital bar is high -- the state requires a three-to-one match. Ronald M. Blank, director of DBED's Investment Financing Group, terms this caveat "the sanity check."

"We see a lot of technology ideas come in here that will knock you over with the 'Gee whiz' factor," said Blank. "But when we get right down to it, we want assurances that there's marketability in the technology. That's where the VCs [venture capitalists] come in. They have the staff expertise to evaluate that."

If a company and its technology look promising, but need better managers, DBED will work with venture partners to locate top talent to take the helm.

The state has become more cautious with its enterprise investments in recent years.

Though Visual Networks got its investment in its first round of private financing, the state now tends to wait for the second or third round -- not true start-up ventures. The state has a separate program for those endeavors, the Challenge Investment Fund.

Despite the enviable return, Blank believes the most important payoff to the state has been quality job creation.

"Any financial gain on the investments is just icing on the cake. The more important element here is high-tech job creation," said Blank.

The 17 companies that the state has invested in thus far employ more than 600 today, according to DBED estimates. Visual Networks, Blank said, is a good example of the impact the program can have on the state economy.

"When we met with them initially, they had maybe five employees. Today, they probably have 100 with salaries of $60,000 to $70,000 a year. And they are a good candidate to go public at some point soon," said Blank.

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