Venture Capital Hits All-Time High

Venture capital has a record year in U.S. and Washington

Venture capitalists are finally taking notice of Washington-area businesses. As venture capital investments in the United States near a record high in 1996, so will deals in this region, several analysts say.

A quarterly report prepared by Coopers & Lybrand predicts that U.S. venture capital investment in 1996 will total $9 billion, a 36 percent increase over the $6.6 billion in deals one year ago.

According to the report, there have been 18 venture capital deals worth $76.7 million in Maryland, Virginia and Washington in the second quarter alone. The first quarter produced 17 venture capital deals worth $60.1 million.

The amount of money generated by venture capital deals in the first two quarters is the highest ever for this region, said Cory Starr, a partner in the high-tech practice of Coopers & Lybrand, McLean, Va.

Overall, U.S. venture capital investments in the second quarter of 1996 outpaced any previous quarter with $3 billion going to 584 U.S. companies. The first quarter saw $2.3 billion in deals, which was poured into 489 U.S. companies. The first two quarters of 1995 produced $2.9 billion going to 712 companies, according to the report.

"The trend for the rest of the calendar year will be at a strong and intense pace," said Starr. "The stock market will continue to feed the capital supply," he said.

Larry Alleva, partner in charge of the Southeast technology industry for Price Waterhouse LLP in Falls Church, Va., agreed the trend will continue.

"When the year's numbers are in, it will turn out to be a record year," said Alleva. "Supply and demand dynamics are changing in terms of where the money is going." Washington's venture capital has been financing new companies and providing second and third-round financing Telecommunications companies, biotechnology companies, software developers and health-care companies got the lion's share of funds.

Last week, Arjun Rishi's company, Export Software International, Reston, Va., caught the eye of Battery Ventures, a $160 million venture capital firm with offices in Wellesley, Mass., and San Mateo, Calif. Rishi began seeking venture capital for his $5 million software company in February. Battery Ventures approached Rishi with a deal worth $4 million to help the company keep growing.

Rishi, whose firm also attracted the interest of a venture capital firm in Florida, said the market has finally recognized the region's need for venture capital funding.

Local companies trying to attract venture capital are benefiting from the presence of high-profile companies such as America Online in Dulles, Va., and UUnet Technologies Inc. in Fairfax, Va., Rishi said. On the other hand, the area has yet to reach the profile of the Boston corridor or Silicon Valley.

"Unfortunately, we still have the federal marketplace label," said Rishi.

James Currier, an associate for Battery Ventures, said the 12-year-old firm has started paying closer attention to the "technology entrepreneurs of Washington." The company has invested in five companies in Washington in the last six years.

"The best venture capitalists invest in markets," said Currier. "In Washington, we are following telecom and wireless."

Currier said Washington has lagged behind other regions in attracting venture capital because of weak corporate management.

"Most of the companies in Washington are missing that because they start off as technology companies and end up lacking strong management teams," said Currier.

Alleva disagrees with Currier's observation.

"The fact that there is a positive trend tells me our entrepreneur base and pool of management is doing well," said Alleva.

There are investments to be made, and many venture capitalists are making the most of their deals in the region.

John Higginbotham, president and managing partner of SpaceVest, a $46.6 million venture capital fund based in Reston, Va., said one-third of the company's deals are invested in Washington companies.

"The deals in Washington are on a steady rate right now or will slightly increase," said Higginbotham"

According to Higginbotham, SpaceVest is one of the few firms dedicated to space-related technology companies, including wireless communication, networks and multimedia. The firm makes investments in companies that are not expected to make a profit for three or more years. The deals are typically worth $1 million to $5 million.

Formed in 1991, SpaceVest is one of a handful of venture capital firms in Washington. "SpaceVest is the fourth largest venture capital firm in Washington," said Higginbotham. "There is an emerging venture capital industry in Washington today, compared to five years ago."

National venture capital companies such as New Enterprise Associates in Baltimore and Edison Ventures, Edison, N.J. are stepping up their activities in the Washington region. Another major player in the region and nationwide is Allied Capital in Washington. Also, AT&T Venture Fund recently set up its second-round venture funding in Chevy Chase, Md.

Starr said the region's success is tracking the that of the U.S. economy. "Venture capitalists like a strong market because it creates available capital."

Venture Capital in Washington, Maryland and Virginia

Q2 1996Q1 1996

IndustryInvestmentNumber of dealsInvestmentNumber of deals

Communications $25.5 million5$15.0 million5

Software$0.3 million1$15.2 million3

Health Care$15.5 million4$10.2 million3

Biotechnology$11.7 million300

Source: Coopers & Lybrand

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