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Tech Firms Find Tougher Terrain

Richard M. Tworek started putting out feelers for venture funding soon after he started a software company called Qovia in June 2002. He had 17 years of experience in the business, a talented chief technology officer and a plan to create technology that would make Internet telephone systems work better.

But the information technology industry had just been through what Tworek calls its "nuclear winter." The response he got was clear: Come back when you have a product, customers and revenue.

Matthew Calkins (Larry Morris -- The Washington Post)

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To keep his company alive, Tworek had to use a warehouse as an office and ask his early employees to work for months without salaries. He stretched a $100,000 grant from the state of Maryland for nearly a year -- long enough to allow Qovia to create a product, attract customers and start collecting revenue.

"You could almost think of us as angel investors. We're filling that niche," said Christopher C. Foster, deputy secretary of the state economic development department.

Maryland's grant program received about 350 applications from companies like Qovia last year. Other entrepreneurs turned to the federal Small Business Innovative Research Program, which gives $100,000 to $750,000 to small companies developing new technology. In 2003, 364 companies in Virginia received money from the federal program, compared with 241 in 1999. The number of grants to Maryland companies increased to 325 in 2002 from 243 in 1999.

It was October 2003 before Qovia landed $5.5 million in venture capital funding. Six months later it got $10.6 million more. Venture capitalists say it is companies at that stage, having established track records, that attract the attention of investors today.

Though local venture funding in the second quarter this year was less than at any quarter since 1997 -- 43 companies got a total of $132.4 million in funding -- there is little doubt that area firms still have money to invest.

From 1995 through 2003, about $15.16 billion in venture funding was invested in local companies, but venture firms in the Mid-Atlantic region raised funds totaling $19.8 billion. While some of the money was invested elsewhere, most venture capitalists say they prefer good deals in their backyards.

Nationally, $65 billion in venture funding that had been raised nationwide had yet to be spent at the end of March, according to Thomson Venture Economics. Venture capitalists say they are still looking for promising companies, but they're not willing to gamble on untested business plans.

"For a very small number of the hottest deals, which may or may not be the best deals, there is still a high level of competition," said Gene Riechers, a general partner at Valhalla Partners, a Vienna-based venture fund. But the atmosphere is much more rational than it was during the bubble, he said. "We've returned to more appropriate behaviors in the region, with the amount of money that's invested, the valuations of the companies and the expectations of how long it will take to build a business."

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