State-Run Venture Fund Succeeds With Native Firms

Foster and Good said that despite MVF's desire to participate in later funding rounds, its primary goal is to be an early-stage investor, in many cases providing the money entrepreneurs need to get off the ground. MVF's investment is always passive. It never takes seats on company boards and its VC investments are always relatively small parts of equity financing deals. For every $1 invested by MVF, the goal is that at least $3 be invested by private VC funds.

"We know the places where we want to play," Foster said. "Our goal is to fill the gap between what an entrepreneur has going early on and when he can get actual VC funding."

"The goal of it is of course economic development," said Donald J. Rainey , a partner at venture firm Intersouth Partners , who sits on MVF's advisory board. "In this case it makes money for the public cash register." Actually, the fund usually reinvests its returns in new companies. Only twice, in the big payouts from Visual Networks and Gene Logic, has the fund returned money to Maryland's general fund.

Like any state-run economic development tool, there's always the potential for political interference, Foster said. Imagine a state legislator or agency head whose cousin or a political supporter is starting a high-tech firm.

"Sure, we get those kinds of calls. Somebody who knows somebody, that sort of thing." Foster said. "But I take them, not my staff, and as a courtesy only. The decent thing is to tell them no and tell them why."

Nor does the fund parcel out its money by region or legislative district, Foster said. "The only way for this thing to work is to do investments based on the technology and the profit potential. . . . I've told the people I've hired that if they ever make an investment based on demographicreasons, they're fired."

Good said that one reason the fund may avoid political interference is its relatively small size. If it had more money to invest it could take bigger stakes in companies. It also could hire more people (who are, by the way, paid state salaries; no VC-style bonuses are handed out). "But, theoretically speaking, if we got more money from Annapolis, they would probably want us to spread the wealth around a little."

Investor Sues Telos

Telos Corp ., an Ashburn-based defense technology contractor, was sued last week by an investor -- a New York hedge fund -- that claims the company's directors are frittering away money on million-dollar-plus executive pay packages and expensive consulting deals.

The plaintiff, Costa Brava Partnership III , is managed by Roark, Rearden & Hamot LLC , which often invests in the debt and equity of companies with troubled capital structures. Telos -- which is operationally profitable and has won some lucrative defense contracts in recent years -- went through a leveraged buyout in 1989 that saddled it with debt and debtlike publicly traded preferred stock.

The dividends on that preferred stock have been deferred since 1995, and now total close to $70 million. Under the terms of the preferred stock, Telos is required to begin redeeming it and paying the deferred dividends late this month. But Telos's charter prohibits it from paying dividends on the preferred stock while it has a negative net worth, and Telos has said its current deficit means it won't be able to begin redeeming the preferred stock.

Costa Brava began buying the preferred stock this year at a steep discount to its face value, and now owns more than 16 percent of it. In its lawsuit, it asked a Baltimore City Circuit Court -- Telos is incorporated in Maryland -- to consider the preferred stock as debt, and to put the company into receivership to protect Costa Brava's claim. Costa Brava claimed that the Telos board pays its executives too much money given its capital problems. Chief executive John B. Wood , for example, was paid $1,056,057 in salary and $1,230,000 in cash bonuses from 2002 to 2004.

A spokesman for Telos declined to comment. A group of independent Telos directors is to present recommendations this month for dealing with the company's capital deficit. The report is expected to address the fate of the public preferred shareholders, several of whom, including Costa Brava, have urged the company to seek a buyer or a public stock offering to raise enough cash to redeem the preferred shares.

"We have no comment in view of the pending litigation against the company and against the members of the board," said Douglas Gleason, in-house legal strategist for Roark, Rearden & Hamot.

Terence O'Hara's e-main addressoharat@washpost.com.