Venturing In From Outside
Today, JackBe Corp ., a three-year-old Bethesda start-up, will announce that it landed a $6.5 million round of funding from a Cincinnati-based venture capital firm.
The deal marks the business return of tech entrepreneur Christopher R. McCleary , founder of Annapolis-based USinternetworking Inc . but is also likely to stoke a debate reverberating through Washington's venture capital community: Why is so much out-of-market money flowing into the region, and what does it mean for local investors?
In the three months ended Nov. 1, 62 percent of the capital invested in local start-ups came from investors outside the region, up from 56 percent the previous quarter. A survey by the Mid-Atlantic Venture Association found that 42 percent of local venture capitalists believe competition from out-of-market funds is increasing. None of the respondents thought it was declining.
For start-ups like JackBe, which sells technology that helps customers build Web-based software applications, going beyond the local circle of venture funds may be the only way to raise much-needed capital. Chief executive Luis Derechin said he visited 30 venture funds -- most of them in the Washington area -- before being introduced to Blue Chip Venture Co. , the Cincinnati firm.
But for investors, the situation is more ambiguous: Some say increasing competition might mean higher valuations and more expensive deals that could prevent local funds from getting a stake in promising young companies. Others say more money in the area is a good thing for local entrepreneurs, who will build companies, create jobs and bolster the Washington area economy.
"If you've got capital coming from out of market it's easy to say, 'Oh, new capital, new investors, woe is me, I'm going to be priced out,' " said Julia Spicer , MAVA's executive director. "I think it's healthy -- it's healthy for the entrepreneurs . . . and I think it's a sign of maturation of the funds in our market."
McCleary agrees. In January of this year he joined Blue Chip. The serial entrepreneur served as chief executive of Internet hosting firm Digex Inc . before starting USinternetworking, a once high-flying Internet hosting firm that had shares worth about $70 each in March 2000 but crashed into bankruptcy protection in January 2002.
When McCleary decide to jump to the investing side, he could've signed up with a local fund but, he said, he decided to join Blue Chip because the firm made a commitment to investing in the Washington area. And his history with the fund dates back more than a decade -- Blue Chip invested in both Digex and USinternetworking.
Jack Biddle , a general partner at Novak Biddle Venture Partners , said he views the increased interest from out-of-market investors as an overdue recognition of the quality of the region's companies.
"There's a perception that the market here is underserved in terms of venture funding," Biddle said. "And there's been a significant shift nationally. Washington wasn't historically perceived as one of the four or five best markets. It is now."
In most instances, Biddle added, venture firms from other regions will want a local partner who understands the market and knows the history of various management teams to co-invest with them.
And while the perception that out-of-market investors are growing increasingly interested in Washington's tech companies is pervasive, the phenomenon is far from new. Investments from outside the region have fluctuated in recent years and peaked in early 2002, when information security firms and data analysis companies spun out of intelligence agencies saw hot demand from venture firms.
Spicer, of MAVA, said that for local investors, "it comes down to, 'Okay, we're going to work a little harder to fund our own deals.' " But, she added, "my takeaway is that out-of-market investors saying they have an interest in our market says really good things . . . that we've got great technology and good companies that are growing."
Ed Meehan has helped usher dozens of young entrepreneurs through the business formation process as one of the original directors of Mindshare, an invite-only academy for executives of local technology start-ups. Now he's looking to fund some of those companies himself.
Meehan and partners Jessica Lee and Harry Wilkins recently formed Rittenhouse Capital Partners LLC , a new venture fund that aims to invest in educational technology and for-profit higher-education companies. "We think it's a very appealing investment opportunity," Meehan said, referring to local success stories in the industry such as District-based Blackboard Inc.
Rittenhouse will kick off its fundraising effort in the next few weeks and has already recruited a few notables from the local business community, including Roger Novak of Novak Biddle and Bill Kelvie , Fannie Mae's former chief information officer, to its board of advisers. The firm's executives are hoping to raise $50 million and plan to make investments of $500,000 to $3 million.
"Agencies are not necessarily going to cut IT spending to address the deficit, but they may hold off on investments," said Payton Smith , director of market analysis at Input , a Reston market research firm. About 200 people showed up at an Input conference in the District yesterday to hear the firm's predictions on federal technology spending for the next few years. Bottom line: The government contracting party isn't over just yet, but don't expect the industry's fast growth to last forever.
Ellen McCarthy writes about the local tech scene. Her e-mail firstname.lastname@example.org.