Fewer Area Firms Get More Venture Capital

Washington area venture capital investments rose during the first quarter, though funding went to a smaller pool of more-seasoned companies in the biotechnology and software industries than a year ago.

A total of $197 million was raised in 41 venture capital deals, compared with $187 million in 52 deals during the fourth quarter of 2006. First-quarter investments were 11 percent greater than investments made in the comparable period of 2006, according to the MoneyTree Report on quarterly venture financing by PricewaterhouseCoopers and the National Venture Capital Association.

Industry experts said the increase in local venture investing mirrors national trends that have driven numbers upward in the past five years: Later-stage companies are receiving larger rounds of financing, and the biotechnology sector continues to grab larger shares of funds.

The volume of deals declined nationwide, indicating venture capitalists' willingness to put more dollars into each round of investment. Biotechnology ranked as the No. 1 industry for investment across the country.

For the second consecutive quarter, the largest deal in the Washington area went to Cylex, a Columbia biotech firm that makes and develops diagnostic products to assess patients' immune systems. The firm received $20.5 million in its third round of funding.

Historically, investors have shied away from investing in biotechnology start-ups because of the large infusions of cash needed and long waits for returns on investments. That's beginning to change now that "big pharmaceutical companies are going to be increasingly desperate for new products because their own pipelines are relatively thin and patents are going to be expiring," said Bruce Robertson, who invests in the life sciences sector for H.I.G. Ventures, which has an office in Rockville.

The proposed $15.6 billion acquisition of MedImmune, the area's most successful biotech firm, by AstraZeneca, announced yesterday, is a sign that pharmaceutical companies are interested in purchasing smaller firms at competitive prices, he said.

Still, investments going into local biotech companies have fallen to $34.7 million, 54 percent lower than the fourth quarter of 2006. "When you think about the amount of technology in this area, I find six deals in a quarter to be relatively disappointing," Robertson said.

Locally, software companies received the largest payments, with $68 million going into 15 deals. Arxan Technologies, a Bethesda firm that makes firewall and network security software, received $13.2 million in its sixth round of funding from eight investors, including Paladin Capital and Legend Ventures.

High dollar amounts going into a smaller number of companies has left a void in early-stage funding for start-ups, said Jonathan Aberman, founder of Amplifier Ventures in McLean. In March, he participated in a $2.8 million round of financing with Intersouth Partners for Defywire, which monitors students' location and status over the Internet and wireless networks.

"There's a lot of competition for deals where a fund can put multiple millions of dollars in, but institutional investors don't want to back first-time firms," he said. "Early-stage venture capital as an asset class is underserved."