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Internet, Infotech Companies Snag Venture Dollars

April Young, director of the Potomac KnowledgeWay

By Tania Anderson

Staff Writer

Many Washington area companies have found the secret to obtaining venture capital financing.

Internet, telecommunications and information technology companies grabbed
the lion's share of the venture capital financing poured into local deals in early 1997,
according to the latest venture capital
survey released by Price Waterhouse in New York.

Such companies were involved in six out of the 12 venture capital deals struck in the first quarter of 1997 in the greater Washington area, according to the survey released May 22.

The mix included two local telecommunications and Internet companies and four local software and information technology companies, according to the quarterly survey. Those seven deals accounted for $42 million of the total $68 million in venture capital deals in the greater Washington area.

"A year ago there were less than 100 Internet-based companies in Washington. Now there are over 600," said April Young, director of the Potomac KnowledgeWay, a nonprofit economic development organization in Reston, Va. "If you make venture capitalists aware of the potential of finding a new deal, they'll do the rest."

Nationally, the survey found that venture-backed investments in the first quarter
of 1997 increased 5 percent over the first quarter of 1996. The survey, which tracks 568 venture capital firms, reports there were 572 venture capital deals in the United States, which raised a total of $2.34 billion in the first three months of 1997. A year ago, there were 480 deals, which raised $2.23 billion.

The survey, which tracks several different industries, showed that 62 percent of all the companies receiving venture financing were high-tech companies.

Analysts said Washington area Internet and telecommunications companies will continue to be the dominant recipient of venture capital money.

"There's going to be an increase in the number of such deals available to venture capitalists," said Valerie Gaydos, publisher of Capital Growth, a monthly finance newsletter based in Baltimore.

"There is a large pool of companies to choose from to make investments or to follow and watch for the next five years," she said.

Recent deals include McLean, Va.-based Women's Connection Online, which received $600,000 from a group of venture capitalists last month. The company developed a World Wide Web community for professional women and women business owners.

Netsolv, a software company in Gaithersburg, Md., also received $1.5 million from a group of venture capitalists last month.

Raj Ananthanpillai, founder, president and chief executive of Netsolv, completed the deal in three months and turned away offers from at least four other interested venture capitalists.

"I was told it would take six to 12 months to complete a venture capital deal," said Ananthanpillai, who wasn't expecting such a strong response. "Maybe I had the right business plan and characteristics for a start-up company."

Analysts also said venture capitalists are starting to pay more attention to start-up companies.

The trend was inspired by Savage, Md.-based Ciena Corp., which had the largest venture-backed initial public offering in history in February, said Larry Alleva, regional managing partner of Price Waterhouse's technology industry group in Falls Church, Va.

Ciena, a manufacturer of telecommunications systems, raised $115 million when its 5 million shares of common stock were offered at $23 a share. Venture capitalists are now starting to have confidence in younger companies like Ciena, which had only six months of revenues before it went public.

"Ciena added credibility to the area and investors now have a willingness to look at earlier stage investments," said Alleva. "This trend has happened in San Jose, Calif., Boston and now here."

Now in a secondary offering, the company and its stockholders are offering a total of 10 million shares of common stock, according to a filing with the Securities and Exchange Commission.

Mid-Atlantic Venture Funds, based in Tysons Corner, Va., is an example of a firm making some early-stage investments. The firm took part in both Women's Connection Online's financing and Netsolv's financing.

Benson said the shift to early-stage investing started about 18 months ago.

"The Washington region is becoming very attractive from an investment perspective," said Benson. "What's attractive is the amount of start-up companies coming from government downsizing and other corporate spin-offs."

The Mid-Atlantic Venture Funds, which total $80 million, launched a third fund in March to take advantage of the local, high-tech opportunities. Benson said the $40 million fund is expected to grow to $50 million by July when it has its second closing.

Some local venture capitalists are trying to get outside firms to notice the investment opportunities in Washington area high-tech companies.

Gene Riechers, managing director of technology venture capital at Friedman, Billings, Ramsey & Co. Inc., an investment banking firm in Arlington, Va., is trying to increase the number of local venture capital deals by getting Silicon Valley-based venture capitalists and more local venture capitalists to co-invest in Washington area, high-tech companies.

"There's still not nearly enough venture capital available here," said Riechers. "Outside firms lead to more capital sources for local companies, as well as more contacts all over the country."