Entrepreneurship Takes Root in Netplex

P> Editor's Note: This is the first of a three-part investigation into the state of venture capital in the Greater Washington region. This first, introductory piece looks at why venture capitalists are moving into the area. Follow-up articles will explore the workings of the venture capital industry, highlight key personalities and provide practical tips.

A company's prospects are a judgment call, and venture capitalists have been known to have divergent, even contentious opinions about the same facts. But there's one prospect, in talking with those in the industry, that most everyone agrees on: the mid-Atlantic region is the new hot spot for venture capital. According to the Venture Capital Journal, the mid-Atlantic region financed 178 companies with venture capital -- compared to 472 for California and 165 for Massachusetts. Since 1991, there has been an 80 percent growth in venture capital dollars invested in the region.

Other signals are hard to miss. Recently, the venerable Edison Venture Fund opened an office in Washington, D.C., to be closer to the action. The Silicon Valley Bank, a savvy institution with a hand in venture capital since the days when Steve Jobs worked in his garage, opened a branch in Maryland -- Silicon Valley Bank, East. Scores of mid-Atlantic companies went public last year -- including hot Internet access companies PSINet Inc., Herndon, Va., and UUNet Technologies, Falls Church, Va. That's expected to accelerate as more money comes into the area to take more high-tech and other companies public.

"Venture capital activity is at the highest level it's ever been in this region," said Russell Stevenson, a lawyer who has represented both entrepreneurs and venture capitalists since the mid-'80s. "And it's still pointed up. It's very interesting that Silicon Valley Bank came here. That's one of the few banks in the country that understands venture-backed companies. They have the best reputation for that."

The new consensus is that the mid-Atlantic region is the nation's third- or fourth-largest market for venture capital.

Traditionally, the two biggest regions for venture capital have been Boston and California.

Frank A. Adams, president and CEO of Groetech Capital Group, Timonium, Md., puts it bluntly: "Boston is still holding its own, but the mid-Atlantic region is the fastest growing area in the country for venture capital."

Adams cited the influx of entrepreneurial talent into the area and the high concentration of universities. Venture capitalists used to dismiss the area as too much of a "government town," Adams said. But that's changing. Some government work is opening up to entrepreneurs, as agencies look for innovative ways to "reinvent themselves." In addition, a growing corps of former federal workers is joining the ranks of entrepreneurs -- often because they have no choice. This is perhaps one of the indirect benefits of government downsizing for the region.

Throw in the growing infotech and biotech markets and it becomes apparent that the mid-Atlantic region is ripe for venture capitalists.

Despite the wave-making move of Silicon Valley Bank, most of the new venture capital money comes down the East Coast rather than from across the country. But what's most noteworthy is that new venture capital firms are being formed indigenously -- an important trend because venture capitalists need to be geographically near the companies they back.

"The good thing is a lot of venture firms have been formed here," said Charles W. Newhall III, general partner, New Enterprise Associates in Baltimore. "If it's more than a two-hour drive from the office, you're very reluctant to invest. There's more here in a two-hour drive from Baltimore than a two-hour drive from Boston."

Newhall, who has written a detailed monograph reporting the history of venture capital in the mid-Atlantic region, said venture firms from southern New Jersey to Northern Virginia manage $5 billion to $6 billion in investments. "We've gone from two or three firms in the 1970s to about 50 to 65 firms," Newhall said about the region. "That trend is going to continue."

Venture capitalists might disagree on the merits of a specific deal until the profit and loss statements prove some wrong and others right. But given the new consensus on the mid-Atlantic region, no venture capitalist would disagree with a colleague who sets up a new office within a two-hour drive of the Washington-Baltimore area.

WT is expanding its coverage of the venture capital industry and its impact on the region. Give us your comments, tips and suggestions as we continue to develop this important beat. Send them to technews@technews.com with "venture cap" in the subject line.