Washington's Technology Riches
The region's high-tech industries are luring investors who want to cash in, but don't expect it to be easier to get cash out
Twelve years ago when Michael Miller went looking for strategic investors for Dulles, Va.-based Orbital Sciences Corp., he journeyed to America's financial capital in New York City, to the high-tech haven in Silicon Valley and to Boston.
Now, as Miller searches for investors in his own Reston, Va.-based Spatial Positioning Systems Inc., he doesn't have to travel because the investment community has come to him. The Washington region is increasingly becoming a center for venture capitalists looking to cash in on opportunities that Washington's high-tech community offers.
"In the early 1980s, there was nothing in the Washington region in the way of a venture capital community," Miller said. Today, several banks and other strategic investment firms are committing offices and personnel to Washington in search of the next windfall, including Silicon Valley East, which operates in Wellesley, Mass., CEO Venture Fund of Pittsburgh, Pa., Edison Venture Fund of New Jersey and Signet Bank, which is reportedly considering opening an office here.
"There's great interest [from venture capitalists] now because of the growth in the region's high-tech companies," Miller said. There are now thousands of high-tech companies in the Washington area (see accompanying chart) and high-profile successes such as Vienna, Va.'s online services business America Online Inc., and Internet access provider UUNet Technologies of Falls Church, Va., are luring the nation's top investment firms to Washington.
"The online services business, Internet software and telecommunications industries are a hot button for attracting investors in the Washington region," said William Washecka, director of entrepreneurial services and high tech at Ernst & Young in Vienna, Va. In fact, investors around the globe are looking to pour money into these highly hyped industries -- industries that have clustered in the Washington region.
But even though venture capitalists are following their collective business nose to Washington, that doesn't mean attracting investors is any easier. In fact, some say it's even harder for fledgling companies to find someone who is willing to take a risk.
"The Washington, D.C., region is attracting more venture capitalists, but a lot of them are interested in later stage deals -- and most of the high-tech companies here are still in an earlier stage," Washecka said. It's actually more difficult to attract strategic investors today than it was a decade ago because venture capitalists all over are weary of investing in firms before they have earned actual revenues, Miller said. For instance, many venture capitalists are still smarting from failed forays into biotechnology firms that promised more than they could deliver.
"When Orbital was in the pre-revenue stage, it had several companies interested," Miller said of the local satellite firm that earned revenues of $222 million last year. But today, many investors are looking to make 50 percent on their money in five years and then get out, he said.
It's also more challenging to secure venture capital today because strategic investors know more about what they want to see in a company before they do a deal. "Venture capitalists are more sophisticated and detailed now," Miller said.
So what do venture capitalists look for in young companies? Dave Fisher, a senior vice president with Silicon Valley Bank, said one of the most important things banks look for in companies seeking support is a management team with experience. Investors want to see that the people at the top of a business have successfully run a company before, he said.
A board of directors that is objective and will make logical business decisions is also important and, of course, a detailed business plan is essential, he said.
Miller advises looking at several venture capital firms once a company decides it needs an outside investment "because it's time-consuming and difficult to find a match."
The first challenge companies face is to find an investor who understands their business. But finding investors who are knowledgeable about high-tech businesses is a task, especially when some of the Internet and other new industries are unexplored territory. It's an even bigger job in Washington, where the venture capital community is only beginning to take a gamble.
Jeff Hilber, chief financial officer of UUNet Technologies in Falls Church, Va., said it was especially challenging to find investors in Washington who understood his business of providing access to the I nternet. "If I were in Silicon Valley, there would have been half a dozen banks interested in UUNet in 1993. Here, no one other than Silicon Valley Bank understood the Internet business," he said.
Internet Interest Threatens Biotech Investment
Internet access and software companies, online services businesses, and the telecommunications industry are all experiencing a heat wave as investors clamor to find the next America Online or other hot ticket. With a concentration of these businesses in the Washington, D.C., region, new capital is beginning to steadily flow into its borders. But what about the region's other industry that has traditionally brought in at least a trickle of investment? What about biotechnology?
Analysts say that while the Internet is hot, biotechnology is not. In fact, investor interest in biotechnology is cooling off, said one analyst who asked to remain anonymous. And the influx of new venture capitalists looking for Internet investments could further hurt the region's biotechnology sector, which has become a staple of Washington's high-tech community, especially in Maryland.
"The biotech industry could be hurt because it is not a hot attraction at the moment," said William Washecka, director of entrepreneurial services and high tech at Ernst & Young in Vienna, Va.
Biotechnology financing had racked up a spectacular record in the late 1980s and early 1990s. In 1988, biotech investment rose 70 percent from 1987 to $267 million and jumped to $710 million in 1992.
Even though only an estimated $46 million went to Internet companies in 1993, analysts expect to see that figure to grow at a rate even more astonishing than biotech's explosive rise -- leaving biotech in the dust.