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Tech Firms Find Tougher Terrain

Venture Funds Have Plenty to Invest, But They're Cautious of Where It Goes

By Ellen McCarthy
Washington Post Staff Writer
Monday, October 25, 2004; Page E01

In the first six months of this year, the most active venture capital investor in the mid-Atlantic region completed 23 deals in the Washington area. The source of the funding wasn't a high-flying investment fund with money to burn or a roll-up firm looking for bargains, as it might have been four or five years ago.

It was Maryland's Department of Business and Economic Development, infusing the state's start-up companies with enough capital to stay afloat for a few more months or to complete the next step in product development.


Matthew Calkins (Larry Morris -- The Washington Post)

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Washington's technology scene is coming out of the hibernation induced by the recession and the bursting of the dot-com bubble. Industry veterans say there is no shortage of enthusiastic company-builders in the region. But the entrepreneurs and start-ups emerging today find themselves in an environment different from that during the boom.

Companies can no longer hope to be handed millions of dollars for vaguely formulated business ideas. Instead they are turning to government programs like the one in Maryland that arm them with grants averaging $100,000 .

Many of today's local start-ups aim at markets that only five years ago were considered boring, such as the federal government. The products and technologies at the core of this generation of companies share a single characteristic: utility. Entrepreneurs say they're being asked to prove that what they're selling will help their clients save money, make more of it or protect valuable assets.

And while the pace of dealmaking has slowed, so too has the pace of company development. Start-ups are less likely to rush to market with half-finished products just to beat competitors. Those venture-capital firms that are still investing say it's no longer reasonable to expect the big payoff of an initial public offering or a sale in two or three years.

But while the promise of rapid exits has faded, the dot-com layoffs created a pool of talented people willing to work at reasonable salaries.

There are still customers for technology and investors for specific types of businesses.

"I was concerned when we went through the Internet bubble-burst and the telecom bubble-burst that we'd been dealt a very serious blow that we would not recover from," said Peter J. Barris, managing general partner of New Enterprise Associates, one of the area's oldest and largest venture capital firms. "But I've seen a culture that was created over the last decade that has gone through the bubble and has not been killed off. It's actually showing some good signs of life."

Raising Money

Venture firms such as New Enterprise still have plenty of money, but early-stage companies no longer have easy access to it. Investors are nursing companies already in their portfolio and are looking for less-risky deals in tech firms that have made headway developing products and selling them. So more companies are turning to government grants and loans.


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