Money flows from venture capital firms

Local business leads record year with $213 million deal

You can make a fortune

March 05, 2000|By Mark Guidera | Mark Guidera,SUN STAFF

David Huber is all smiles these days -- and with good reason. His company is only 2 years old, but already it has $215 million in the bank.

Hubers firm, Columbia-based Corvis Corp., which makes Internet optical-networking equipment, is a beneficiary of the appetite of venture investors, who lined up last year in record numbers.

Investments last year in start-up and expanding companies shattered records. The final tally: More than $35 billion flowed into more than 4,000 companies.

Thats 2.5 times the $14 billion raised in 1998, and six times the amount raised in 1995, according to PricewaterhouseCoopers LLP, the accounting and consulting firm.

Its an amazing time right now. Theres big, big money everywhere, said Jack Biddle, founding partner at Alexandria, Va.-based Novak Biddle Venture Partners. The hottest sectors for venture capital include Internet-related services and equipment, telecommunications and business software.

It was the biggest year ever. Most placements were over-subscribed, said Kirk Walden, PricewaterhouseCoopers national director for research.

Two key factors are driving the trend:

First, venture capital firms and institutional investors are flush with cash from pension fund managers and other clients who have done well in the bullish stock market. And, investors are scrambling to land stakes early in promising new ventures that have the potential to tap into huge, global markets, particularly in the high-risk, high-reward Internet, telecommunications and e-business arenas.

Silicon Valley, Calif., the technology powerhouse, has dominated the list. More than 350 deals were inked in the valley that were worth more than $5.6 billion -- in the last three months of the year. More than $13 billion worth of venture capital deals were struck in the hotbed last year.

Regions nationwide saw big spikes in venture activity, with New England and the New York metro area following close on Silicon Valleys heels.

Young companies in the Baltimore-Washington-Northern Virginia region, which is emerging as a locus for high-tech entrepreneurial activity, especially in Internet-related ventures, also benefited from the surge in venture capital financing.

Investments in companies in the region more than doubled last year to $1.7 billion, compared to 1998, with 189 deals signed. Almost half of the money -- $560 million -- was raised in the fourth quarter, an annual survey by PricewaterhouseCoopers found. Maryland companies received about 60 percent of the investments.

Warren Martin, managing technology partner at the accounting firm, said investors turned to the area because of the number of strong businesses started by entrepreneurs spinning out of Internet giants like America Online, MCI WorldCom and UUNet.

Also, Martin noted, the region is flush with investment money as a result of new venture funds launched by some of the new Internet millionaires. The largest deal-maker in the country last year was Baltimore-based venture capital stalwart New Enterprise Associates, which invested more than $412 million in 121 companies.

As for the largest financing package nationally, that was the one inked by Corvis, which raised $213 million.

The next largest deal in the region was the $60 million raised by Hotwire Services Inc., a Reston, Va., provider of integrated communications networks.

Huber, who helped found Ciena Corp. in Laurel, said Corvis planned to raise between $50 million and $100 million last year. But that figure jumped significantly when two potential customers for its equipment came knocking, Broadwing Communications and Qwest Communications.

Huber decided the company needed more cash to quickly expand its manufacturing capacity to meet potential demand and embark on an aggressive hiring effort. The company expects employment to jump from about 300 to more than 500 in a year.

The Corvis financing package shines a light on another element driving the venture financing game: Two of the money partners, Meritech Capital Partners and Integral Capital Partners, arent venture capital companies, but traditionally take early stakes in coming initial public offerings.

I think whats happening is that companies like Meritech are finding that if they wait until an IPO, they must pay a higher valuation than they are used to, said Huber.

Biddle, of Novak Biddle Venture Partners, agrees. He said last year was marked by an increasing number of new players in the venture financing arena wanting in on the action.

The reason: Historical returns from early investments have tripled in the past several years as a result of the stock markets frenzied acceptance of new issues, especially those tied to the Internet and communications. And the stratospheric public valuations of some of those companies have made investing and ushering them to the IPO stage hugely beneficial.

Many of these companies are worth several million as private entities, but if you take them public they can be worth billions, said Biddle. Its real simple why theres so much venture money around: In this market, you can make a fortune.

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