State-Run Venture Fund Succeeds With Native Firms

Martin Roesch, center, got a prize at last year's Northern Virginia Technology Council Hot Ticket Awards picnic. Roesch founded Sourcefire, sold this month for $225 million.
Martin Roesch, center, got a prize at last year's Northern Virginia Technology Council Hot Ticket Awards picnic. Roesch founded Sourcefire, sold this month for $225 million. (By Michael Lutzky -- The Washington Post)
By Terence O'Hara
Monday, October 24, 2005

When Sourcefire I nc. , a systems security software company, sold this month for $225 million in cash, some of the biggest names in venture capital chalked up a major payday. Four VC firms, including local shops New Enterprise Associates and Core Capital Partners , collected about six times their $34 million investment in the Columbia-based firm since 2001.

But perhaps the people most responsible for getting Sourcefire off the ground were a few mid-level state employees in Baltimore who run one of the most successful early-stage venture funds in the region, the Maryland Venture Fund . Their investment of $550,000 of public money in Sourcefire in 2001 -- when Sourcefire founder Martin Roesch was developing the software in his Carroll County basement -- netted $3.9 million when the company was sold.

The Maryland Venture Fund was started in 1994 and is a leader among state-run funds. About 35 other states have venture funds of some kind, but none is as large as Maryland's. Most, including funds in the tech centers of California and Massachusetts, offer much smaller equity investments, focusing on technology transfer from research institutions.

MVF is run by six employees of the Maryland Department of Business and Economic Development. It has invested $48 million in more than 100 companies, in traditional venture-equity investments and in seed financing for basement-and-garage technologists with good ideas. It has returned $59 million in cash from more than a dozen exits and has an active portfolio of about 50 venture investments in the biotech and information technology industries. It last reported the market value of its venture investments, in June 2004, at $20.6 million.

In its 10 years, MVF has an annual internal rate of return of close to 30 percent, officials at the fund said. The benchmark annual average for the venture fund industry is 20 to 25 percent.

Like any venture fund, MVF's returns are largely attributable to a relatively few big payoffs. The fund cleared more than $16 million in profit from the sale of Gene Logic Inc . in 2000, and more than $27 million from the initial public offering of Visual Networks Inc . in 1999.

From 2000 to 2004, the fund had no big-money exits. Five exits since 2000 lost money, and two of those were nearly total losses.

But since June 2004, the fund has had four exits that have returned three times each investment or better. In addition to Sourcefire, MVF cleared $2.4 million from a $600,000 investment in Platform Logic Inc. when that company was sold to Symantec in December 2004. It tripled its $500,000 investment in Baltimore's Inc. when it was sold to America Online for $435 million in June 2004. And Panacos Pharmaceuticals Inc. , a Montgomery County developer of antiviral drugs, several months ago returned $1.85 million on a $500,000 investment when it merged with a publicly traded Massachusetts company.

In the past 18 months $11 million has been returned to the fund through "liquidity events," such as a sale of a company or an IPO.

"We're on a path to be self-funding," said Christopher C. Foster , deputy director of the Department of Business and Economic Development, who oversees the fund. MVF gets an annual appropriation from the Maryland General Assembly to cover operating expenses and expected investments, but Foster wants new investments to be funded entirely by returns on old ones. With the returns so far this year and those Foster expects next year, the annual appropriation has dropped significantly. Last year, Foster asked for $7.5 million, and he got it. This year, the fund will get $2 million, and Foster expects to request only $1 million next year.

Foster also has removed the informal (and sometimes exceeded) $500,000 cap on investment in one company. He said the cap limited the fund's ability to participate in later venture funding rounds. Most venture-funding companies go through at least two rounds of funding, and some as many as six. In industry parlance, unless early investors "re-up" and invest in later rounds of funding, their equity stake in the company is diminished, as is any final return.

Elizabeth Good , who became managing director of the fund in 2004, said one of MVF's biggest investments is $775,000 in Frederick-based Qovia Inc. , a company that provides monitoring of networks for Internet phone calls. In addition to lending Qovia its seed money in 2002, MVF has participated in both rounds of Qovia's VC funding, which totaled $16 million.

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