By Cecilia Kang
Washington Post Staff Writer
Tuesday, October 24, 2006; D01
Venture capital investments in the Washington region dropped during the third quarter but were relatively strong compared with historical levels, with the vast majority of money going to more mature investments in information technology and biotechnology companies.
A total of $332 million was raised in 54 venture capital deals, compared with $457 million in the second quarter, according to the MoneyTree Report on quarterly venture financing by PricewaterhouseCoopers and the National Venture Capital Association.
Companies typically receive venture capital in various stages as they work on becoming profitable, attracting a buyer or going public. Later-stage investments represented 81 percent of all deals in the region during the quarter ended Sept. 30.
Investors said that the percentage of later-stage investment was typical of the days before the technology boom, as investors sought out businesses with proven track records and potential for growth.
"Very few funds are looking for early-stage deals because they are a lot more work and lot riskier," said Jack Biddle, a partner at Novak Biddle Venture Partners in Bethesda.
The largest third-quarter venture deal in the Washington area was in telecommunications: SunRocket Inc., a Vienna-based Internet phone service provider founded in 2004, received $33 million in a fourth round of funding from investors that include Anthem Capital Management LLC, BlueRun Ventures, Doll Capital Management and Grosvenor Funds.
Deals in the telecommunications industry were sparse, but payments were big. Telecommunications firms received a total of $71.2 million in five deals. Ruckus Network, which runs an online entertainment site for college students, received $13.7 million in a third round of financing.
Software and biotechnology companies also topped the list.
About $75 million was invested in 17 software companies. Freewebs Corp., a Silver Spring company that helps people build and maintain Web sites, received multiple investment offers from venture capital firms inside and outside the Washington area. After operating five years on an initial $2,000 investment by founders and brothers Haroon and Zeki Mokhtarzada, the company caught the attention of venture capitalists when its collection of sites started moving up the rankings for national and global Web traffic. By the time users had created more than 11 million Web sites, attracting a total of 17 million unique visitors, investors came calling.
The company initially received $11 million in funding from Columbia Capital LLC, Novak Biddle and unidentified individuals.
"There were competing term sheets presented, and some investors even asked us to move to California," said Shervin Pishevar, Freewebs' president. "They are definitely out there looking for companies that are getting attention."
Six biotechnology companies received a total of $42.5 million, down sharply from the previous quarter, when $144.9 million was invested in 13 biotechnology companies.
Investors said sudden fluctuations in investments highlight the region's smaller venture capital market compared with areas such as Silicon Valley. And like the other markets around the nation, investors were raising fresh funds in the quarter, which will show up in more investments later this year and next year, according to Biddle.
"The Washington venture capital market is historically volatile because one telecom deal can really skew the numbers," he said.
Nationally, venture capitalists invested $6.2 billion in 797 deals, down about 8 percent from the previous quarter, according to the new data. The biggest deal was a $209.4 million investment in Cilion Inc., an ethanol producer in Goshen, Calif., by Khosla Ventures and an undisclosed investor.