Where the Smart Money's Going in '07

An increase in biotechnology deals will reflect the continued development of the industry in Maryland and the addition of Janelia Farm Research Campus in Ashburn, part of the Howard Hughes Medical Institute. During the third quarter, $42 million went into six biotechnology deals in Washington.

Because of the lengthy clinical trials required to get a drug approved by the FDA, investors are less likely to bet on pharmaceuticals than on medical devices, which tend to produce smaller but more reliable returns.

While some deals are large, the number of local firms making investments in the area is relatively low. Bruce Robertson, a locally based managing partner with H.I.G. Ventures of Atlanta, which does almost half its deals in the life sciences industry, said he does not have any Washington area companies in his portfolio, despite receiving more than 1,000 proposals last year.

"We're looking cautiously, not because the markets aren't big, but because it's more expensive and risky," he said.

As the technology sector continues to recover and other industries enter the local market, the Washington area is emerging as an active and sought-after investment target. Several local firms have been aggressively raising more capital. In 2006, 200 firms in the region raised nearly $1.3 billion in new funds.

"That means our limited partners -- pension funds, universities and corporations -- have a lot of trust in our investors here," said Julia Spicer, executive director of the Mid-Atlantic Venture Association. "They're making good investments, getting good returns, and people are reinvesting in the region."

But the figures also reflect the larger sums investors are putting into individual businesses. Many local funds are now attracted to companies that need larger infusions of cash -- $3 million to $5 million -- rather than start-ups that need less than $1 million.

Unlike the late 1990s, when venture capitalists seemed eager to throw money at any two-man shop with a decent idea, they're now searching for seasoned entrepreneurs who have already acquired customers and steady revenue.

"Firms aren't doing as much early-stage investment anymore," Backus said. "Entrepreneurs looking for $2 million are having trouble finding it."

Jonathan Aberman, who started McLean-based Amplifier Venture Partners in 2005, has tried to fill that gap by investing more modest sums in promising companies. The firm recently contributed to a $1.75 million investment in FlatBurger, a New York start-up that distributes and tracks software components.

"We're getting a lot of concentration of capital in fewer hands," he said. "Investment's going to be more selective."