In Maryland's 'innovation economy,' a contrarian view of acquisitions

Region's startup community is growing but dwarfed by Silicon Valley; entrepreneurs want more California money to flow here

  • Co-founders Guy Filippelli (left) and Renny McPherson are reflected on a board with names of team members at RedOwl Tuesday, Jun 24, 2014.
Co-founders Guy Filippelli (left) and Renny McPherson are… (Karl Merton Ferron, Baltimore…)
June 28, 2014|By Jamie Smith Hopkins, The Baltimore Sun

Whenever Baltimore-area companies sell themselves to out-of-state firms, economists and local leaders alike bemoan the loss. Another headquarters gone. Fewer corporate decision-makers here. Possible job cuts.

But Silicon Valley's deals for two Columbia firms — the planned Micros Systems acquisition, announced last week, and Sourcefire last year — strike local entrepreneurs in an entirely different way.

They want more California tech giants doing business here, more billion-dollar-plus acquisitions. They're crossing their fingers that Micros execs take the money they get from the sale to Oracle and invest it locally — either by starting new companies or turning venture capitalist.

"Maryland should hope to be an acquisition target," said Mike Brenner, co-founder and chief executive of Betamore, a business incubator that opened in Baltimore last year. "To see recent acquisitions of Micros and Sourcefire in the billions of dollars shows that we are building incredibly valuable and long-lasting companies."

Little surprise that startups — and the people who help them — come at the acquisition debate from that angle. Plenty of entrepreneurs would love to be bought out — sometimes so they can start fresh with another idea.

It's this high-reward, high-risk slice of the economy that state officials are pushing hard to expand.

In the last two years, Maryland raised $84 million for early-stage venture funding by auctioning tax credits, held two national contests for startups, launched a partnership to get more university research commercialized and began offering tax credits for cybersecurity firms.

Gov. Martin O'Malley calls it the "innovation economy," saying in a speech last fall that such innovations "drive the new solutions that create the new jobs and opportunities."

The U.S. Chamber of Commerce Foundation ranked Maryland first in the nation for the past three years on innovation and entrepreneurship, helped by its high concentration of academic research and development and jobs in science, technology, engineering and math fields.

That speaks more to the state's potential than results. The entrepreneurship-focused Kauffman Foundation, measuring the rate of adults forming businesses, found that entrepreneurial activity in Maryland was about average — 26th in the country. (That's all businesses, not just fast-growth startups.)

But if a single measure captures both Maryland's strengths and how much room there is for improvement, it's venture capital.

Businesses in the state landed $645 million in VC funding last year, up 50 percent from the year before, according to the MoneyTree report produced by PricewaterhouseCoopers and the National Venture Capital Association with Thomson Reuters data.

That's more than all but five other states in the country.

But Maryland is far removed from California (nearly $15 billion), Massachusetts ($3 billion) and New York ($2.8 billion), the top three.

It would be no easy feat to rival California for startups, let alone get to that state's level of big tech firms. That's part of the reason California firms were the acquirers in the Sourcefire and Micros deals, not the other way around.

Richard Clinch, a locally based research economist at Battelle Memorial Institute, said the state isn't reaching its full potential, given its academic R&D and other assets. He points to taxes and other policies that hand advantages to competing states in the battle for headquarters firms.

"Nobody says we're a slouch when it comes to generating companies," he said. But "most of these companies end up moving or getting acquired before they become Oracle."

Then there's the vicious cycle issue: It's harder to raise money outside of Silicon Valley, Boston and New York, so startups cluster there. Maxwell Wessel, a researcher for the Forum for Growth and Innovation, put it bluntly in a blog post for the Harvard Business Review last fall: If your company needs VC funding and you don't base it in one of those three hubs, "you're stacking the deck against yourself."

James C. Foster, CEO of ZeroFOX, a cybersecurity firm that launched in Baltimore last year, thinks Maryland has one of the best state-funded venture funds in the country. But it can't provide enough money to kickstart a company by itself, he said — that's where private funders come in. And those options are limited, compared with Silicon Valley.

"I could probably visit most of the regional players and VCs in two days — three days at most," Foster said. "If I were in California, I wouldn't even get done one complex on Sand Hill Road in two days."

He's pointing out a challenge for entrepreneurs, not griping. He's lived in California, Boston and New York, and he chose this area for a reason — "Maryland-D.C. is the mecca of security."

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