A Slower But Steady Venture Capital Flow

Venture capitalists invested less in Washington area businesses in the quarter ended in June than in the second quarter last year, when three large deals pushed the total value of investments sharply higher.

Over most of the past year, venture funding has been steady, according to investors, who said new funds were established that put fresh capital into life-science and technology start-ups.

Venture firms invested a total of $271.8 million in 52 companies during the three months ended in June. Although investments were made in a similar number of companies in that quarter last year, three unusually large investments, including one of $130 million, brought the total to $451 million, according to a survey by PricewaterhouseCoopers and the National Venture Capital Association. In the first quarter of this year, $210.7 million was invested. In the fourth quarter of last year, the total was $187.1 million.

Nationally, venture capital investments totaled $7.13 billion for the second quarter, compared with $6.95 billion during the corresponding period in 2006, according to the survey.

"One quarter doesn't make a trend, and across the board, Washington has been stable," said Mark Heesen, president of the NVCA. "There were a lot of small, seed investments, which means it's a good time to be an entrepreneur in Washington right now."

Local deals were spread across the life-sciences, telecommunications, software and Internet industries, with the biggest deals made in biotech firms.

The largest second-quarter investment was $25 million in Intrexon, a life-sciences company in Blacksburg, by Third Security of Radford, Va. Intrexon researches and develops therapeutics for diseases that can't be treated by traditional drug remedies.

Silicon Valley's InterWest Partners made the quarter's second-largest investment, $20 million in an unnamed local company. Heartscape Technologies, a Columbia company that makes a device that detects heart attacks, received $17 million from firms including Radius Ventures in New York.

In the second quarter of 2006, investments of $55 million and $45 million were made, along with the $130 million investment.

Biotechnology firms also attracted interest from venture firms outside the region.

Heron Capital of Indianapolis invested $11 million in BioSET, a Rockville company that makes peptides used in medical devices to improve bone and soft-tissue repair.

Kevin Etzkorn, managing director of Heron, which runs a $24 million fund focused on early- to mid-stage life science companies, said he was attracted to BioSET partly because of its ability to tap into Washington's life-sciences industry.

"That a company can leverage academic and research resources there means you get more bang for your buck with those relationships close to home," Etzkorn said.

New funds opened by local venture firms including Valhalla Partners and Novak Biddle Venture Partners created a more robust financing environment, according to investors.

"This area has always had good deal flow with a good ecosystem between government, universities, telecommunications companies and software companies," said Harry D'Andrea, a partner at Valhalla, which just opened its second fund, worth $264 million. Valhalla invested $12 million in ExaDigm, a wireless telecom company. "I would view this as a validation of this region," he said.

Many deals were early-stage investments and for relatively small amounts. The Maryland Technology Development Corp. made eight deals involving start-ups for $100,000 or less.

Although the investment climate appears rosy, Jack Biddle, a partner at Bethesda's Novak Biddle, cautioned that too much money could be flowing into start-ups nationally. When his firm raised its fifth fund last year, it received $2 billion in commitments for the $227 million fund. Returns, meanwhile, have been steadily declining for most venture capital investments, he said, a sign that the price of deals has become inflated as more funds compete for start-ups.

"There are a finite number of good ideas out there," Biddle said. "If the best firms are putting up single-digit returns, something has to give."