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Venture Funding Up in 2004

4th-Quarter Surge Reverses 3 Years of Investment Decline

By Terence O'Hara
Washington Post Staff Writer
Monday, January 24, 2005; Page E01

Venture capital funding in the Washington area grew in 2004, reversing a three-year decline and confirming anecdotal evidence that a crucial source of money for early-stage companies is on the rise again.

A surge in fourth-quarter funding pushed 2004's total venture financing in the region to $866.1 million, compared with $807.2 million in 2003, according to the quarterly MoneyTree survey of venture firms. Fourth-quarter funding was $352.7 million, a 60 percent jump from the fourth quarter of 2003.

Tim H. Meyers, left, Updata Partners. (The Washington Post)

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Venture Capital Section

The survey, which is conducted by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, showed that in the most recent quarter, biotechnology and software received the majority of venture funding in the region.

Biotechnology financing, typically a highly cyclical user of venture funding, received the largest portion of VC funding in the fourth quarter: $126.1 million, in 13 companies. Three of the five largest deals in the quarter were with biotech firms. Prestwick Pharmaceuticals Inc. of the District had the biggest single funding in the quarter, pulling in $37 million in a second-round of venture funding in December, a deal led by Pequot Ventures. Prestwick is developing treatments for disorders of the central nervous system, such as Parkinson's disease and schizophrenia.

"The larger deals, especially in biotech, bodes well for the local economy," said William S. Corey Jr., a partner at accounting firm PricewaterhouseCoopers who specializes in venture funds. "It's an excellent driver of employment for our area. Generally the types of jobs created are high-paying jobs."

In the software arena, the region's biggest users of venture funding were mostly developers of business software, such as application monitoring, data management and security software. The region's biggest fourth-quarter software deal was a $27.6 million round of funding for Timonium, Md.-based I4 Commerce Inc., a maker of electronic transaction software.

The quarter's funding showed the continuing preference among venture investors for later-stage deals, or deals in which a company is more firmly established, has revenue and needs money mostly for expansion. Early-stage or seed deals -- money for companies that typically are just getting started and have little or no revenue -- continue to be the exception. About 59 percent of the deals in the fourth quarter were for expansion. Early-stage investing dipped to 7 percent of all deals, compared with 27 percent in the third quarter.

The same trends are visible nationally. In the fourth quarter, $5.3 billion was invested in 747 venture deals in the United States, up from $4.6 billion in the third quarter. The U.S. total venture funding in 2004 was $20.9 billion, up from $18.9 billion in 2003, reversing the downward trend that began in 2001.

Coming at the tail end of the technology boom, 2000 was the most active year ever for venture financing: $105.9 billion. That number fell to $41 billion in 2001 and fell each year thereafter, until 2004.

Venture investing is among the riskiest type of equity investing, typically taking the form of preferred, convertible stock. Entrepreneurs who accept such funding typically must cede a degree of control over the company to venture investors, and many are wary about doing so unless the venture funding is required to expand the company.

Tim H. Meyers, a Reston-based partner at venture fund Updata Partners, said the rise is being driven by an easing of such concerns. Entrepreneurs are feeling better about the economy and are worried about their competitors expanding, he said.

"They are seeing that now is the time when it makes sense to invest in the growth of their business," Meyers said. "They don't see taking venture capital as as big of a risk as they used to."

On the other side of the equation, several venture funds that are active in the region began to open the spigot in late 2004, Corey, of PricewaterhouseCoopers, said.

"A lot of funds raised money in late 2003 and early 2004," he said. "They did their due diligence over the summer and wrote the checks in the later part of the year."

Meyers said the conditions that helped fuel growth in venture financing should remain in place at least through the first quarter of this year.

"We have a number of term sheets out right now," he said, referring to the contracts governing a venture deal. "This could be one of our most active quarters in a while."

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