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The Download, Shannon Henry

Tending The Local Money Tree

By Shannon Henry
Thursday, January 27, 2005; Page E01

Start-ups still gain prestige from having the name of a Silicon Valley venture capital firm on their list of funders, but local technology companies are increasingly finding investors with a presence in their own back yard.

While about 15 percent of all venture capital investments in Washington area technology companies in 2000 came from funds also located in the area, that number grew to 21 percent last year, according to data released this week by the National Venture Capital Association.

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"It's a sign of the local venture industry maturing," said Amir Hudda, chairman of Brickstream Corp., the second venture-backed company he has founded locally. Hudda says start-up executives should seek funders with local connections because the investor's network -- from potential hires to other financiers -- tends to be strongest within its own region. Brickstream, which was founded locally but moved its headquarters to Atlanta after an acquisition there, makes software that analyzes consumer behavior. The company lined up its first funding, a $6.2 million round, from Alexandria-based Columbia Capital and Mohr, Davidow Ventures, a Silicon Valley firm that has an office in Reston run by partner Mike Sheridan. "I always say, 'First find a local partner,' " said Hudda. He adds that he can easily have lunch or breakfast with Sheridan, even though he represents a West Coast firm.

Emily Mendell, director of public affairs for the Arlington-based National Venture Capital Association, says the numbers reflect the trend her organization is seeing. Venture capital firms are increasingly splitting into two camps: the massive players like New Enterprise Associates (which has offices in the Silicon Valley and Reston) that make investments all over the country and often open satellite offices to keep close watch on certain deals, and the smaller local players, such as Novak Biddle Venture Partners in Bethesda and Valhalla Partners in Vienna, which tend to focus primarily on Washington area or mid-Atlantic companies. Entrepreneurs look either for a local fund or for a regional partner of a larger fund, she says, and venture capitalists agree it's better to be close to their investments. "You're seeing regional firms sticking to their geography," Mendell said.

Andre Yee, president and chief executive of network security company NFR Security in Rockville, said he pitched his company to several West Coast venture firms, but he ended up with local money from Lazard Technology Partners in Washington and Edison Venture Fund, which is based in Lawrenceville, N.J., but has an office in McLean. Yee said it's helpful to have an investor with an office nearby. For example, two days before Christmas, he faced some difficult problems that needed immediate attention. He was able to set up a quick in-person meeting with his Edison investors to figure things out. Yee also said local venture capitalists move faster doing due diligence -- the official checkup on finances and reputation before a deal is signed -- because reference checks are often with people who know each other.

Before the tech bubble of the 1990s, local firms looked westward, in large part because the Washington area simply did not have enough early-stage capital to offer. Often the outside investors would ask Washington firms to move to Silicon Valley, Boston or wherever they were based to be closer to the funders. During the bubble years, local executives were enamored of the West Coast style and thought listing a company such as Kleiner Perkins Caufield & Byers would grease their way to the fame and fortune of the public markets.

After the technology bubble burst, investors became more conservative and stayed closer to home to do deals because they wanted to keep a closer eye on their money, says Art Marks, general partner with Valhalla Partners. Now, said Marks, "if you're an entrepreneur, you can get good local satisfaction." And vice versa. Four of Valhalla's seven investments are in the Washington area. "If we make money by adding value, you do that best by being nearby," Marks said. "Anybody can parachute in for a board meeting."

Kevin Kernan, president and chief executive of McLean-based Secure Software Inc., said he wanted Valhalla to co-invest with his company's Boston funder, Charles River Ventures, on its $5.25 million first round of funding. Kernan said he also wanted the expertise of a Washington investor on the public sector market, something he wouldn't find in a financier outside the region. And Kernan wanted help recruiting top staffers locally for the computer security company.

Executives speaking on the subject of local vs. outside fundraising at an event earlier this month said that there is a cultural difference among venture capital firms in different regions. East Coast investors tend to be more focused on a company's operations and financials, while West Coast firms are more interested in the long-term, big-picture approach, according to panelists who spoke at the Northern Virginia Technology Council's event at the Center for Innovative Technology in Herndon.

Yee gave the audience one bit of universal advice, regardless of whether the executive is pitching to a Boston, New York, Silicon Valley or Virginia firm: Try out your pitch first on your least preferred investors, he said. Get some practice. He said every time he pitched again, his speech got better.

And for all the talk of preferred venture capitalists or favored regions, Hudda acknowledged that the entrepreneur just starting out cannot always be choosy. Local capital is clearly best, he says. But in the end, Hudda said, "you take the money from where you can get it."

Shannon Henry writes about Washington's technology culture every other Thursday. Her e-mail address is henrys@washpost.com.

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