Netplex Lags in IPO Financing
The Netplex is hot on high-tech public offerings, but financing is not keeping pace
When Richard Lefebvre, president and CEO of AXENT Technologies, Rockville, Md., needed financing prior to the company's initial public stock offering, he turned everywhere but the Washington, D.C., area.
Regional analysts and investor consultants say the Netplex has not yet become a significant source for capital resources for high-tech companies.
But that has not stopped high-tech entrepreneurs of the Washington area from cashing in on the frenzy of initial public offerings. In 1995, there was more than one local high-tech public offering per month - 55 companies made initial public offerings or secondary offerings worth $274.8 million.
Two-thirds of those companies are located in Northern Virginia, and the rest are in Maryland, and Washington, D.C. Internet companies led the public stock offering rally followed by biotech and electronics deals.
And it's no wonder. Silicon Valley Bank opened a branch in Rockville, professional firms, such as Ferris Baker Watts, are focusing on high-tech, and commercial bankers, such as NationsBank, are launching the Washington Technology Group to invest in high-tech. But high-tech companies have yet to turn to Washington for pre-public offering financing, industry observers say.
"In Northern Virginia, we're not in the midst of a boon, we're on the verge of a boon," said Doug Poretz, an investment relations consultant in McLean, Va. "The [financial] infrastructure has yet to be built."
The Washington area is starting to see a network of angels, industry investors, venture capitalists and private placement specialists. Entrepreneurs have traditionally turned to Boston and California for venture capital.
Doug Henton of Joint Venture Silicon Valley in Palo Alto, Calif., said local financial resources contributed to the development and growth of Silicon Valley. Civic entrepreneurs, which Henton refers to as successful business people who have the money to reinvest in the community, played a significant role in building the high-tech region in Palo Alto, Calif., known as Silicon Valley.
"I think Northern Virginia as an entrepreneurial center is where Silicon Valley was 10 years ago," said Henton. "The civic entrepreneurs are going beyond building big businesses."
Philip Cruver is looking for civic entrepreneurs. His two-year-old company, EIC Information Technologies in McLean, Va., is hoping to attract industry investors and angels.
The company needs $500,000 of common stock and hopes to have an initial public offering within six months. The company went through two rounds of selling convertible preferred stock, raising $215,000.
That stock was sold to a group of 10 entrepreneurs in California who understood Cruver's technology and believed in it enough to invest in the company.
"It is very difficult to find seed capital for startups everywhere," said Cruver, who has owned two public companies. "I think Washington is getting better and breaking out of its real estate mentality."
"What is appearing here is a product of a three-year justification cycle," said Stephen Fuller, a public policy professor at George Mason University. Fuller said that the Washington area is just now entering a new phase of a business cycle that was born in the early 1980s.
Lefebvre took his company, AXENT, public in April 1996 on the NASDAQ stock exchange. His company was venture-backed by the original owners of the company, T.A. Associates, Boston.
"In the early days of a business, you don't have smooth operating results because of the wait for product releases," said Lefebvre. "So for early-stage technology companies, venture capital is the best route."
Mario Morino, founder and president of the Potomac Knowledgeway, is counting on entrepreneurs that were responsible for forming the Washington high-tech region to fuel the next business cycle. He says that the first wave of entrepreneurs that spawned the region from the 1960s and 1970s will soon be willing to reinvest in new businesses.
Poretz sees great benefits for the local financial community from the demand for high-tech financing.
"There will be great opportunities for investors, facilitators, consultants, attorneys, brokers, auditors and accounting firms," said Poretz.