Region's Venture Capital Rank Slips

What's more, many of those deals involved early-stage companies.

"You're showing new companies get started, which have a chance to grow, as opposed to having investment in late-stage companies. That doesn't create a new company. It sustains an existing one," said John Burton, co-founder and managing general partner at Updata Partners in Reston and chairman of the Mid-Atlantic Venture Association.

The Washington region, and Rockville in particular, has tried to build a substantial biotechnology industry, but venture capitalists say other areas have a better reputation and a more fertile ecosystem for biotech companies.

The Southeast, in particular the Research Triangle in North Carolina, has been a top destination for life sciences venture capital.

"Most of the largest pharmaceuticals in the world have some kind of presence" in the Research Triangle, said John Glushik, a general partner with Intersouth Partners in North Carolina. "That's less the case in the D.C. area. You don't have as many of those executives leaving the pharma and biotech public companies looking for opportunities to grow."

James Barrett, a general partner at New Enterprise Associates in Chevy Chase, Md., said Washington largely lacks the key ingredient -- a strong university research arm -- needed to attract that capital.

The National Institutes of Health "is a national resource, and they can't play geographic favors," he said. Meanwhile, local universities have not made strides to cultivate commercial opportunities for their research, he said.

Carol Nacy, chief executive of Rockville firm Sequella, which is searching for a tuberculosis cure, said "it would be a shame to insist that the only place where good science is done is in a university." She said the NIH and other government labs have strong programs to support small business.

Nevertheless, Nacy, whose company is funded by investors, hedge funds and the government, said she would like venture financing but finds there aren't many local firms willing to back biotech companies. "They can be very important in helping you make relationships with other companies that are doing similar kinds of things and for guiding the business end of it," she said.

While regions compete to be No. 2 or No 3., Silicon Valley remains the king of venture capital, accounting for about 10 times more venture funding than Washington.

When Silver Spring Web 2.0 company Freewebs recently spun off its Social Gaming Network into a company that builds games to be played on Facebook and other social networks, it based the new firm in Silicon Valley.

"Silicon Valley is the Mecca of most of the technology companies in our space, so it kind of behooves us to have a presence there," said Shervin Pishevar, Social Gaming Network chief executive. "A lot of the IT world in the Washington, D.C., area is heavily reliant on government contracting and so that has some effect in terms of the psychology of innovation."

Then again, he said, Freewebs has no plans to move. "That doesn't mean Freewebs and others can't thrive out here in Washington," he said. "It's our vision to build Silicon Springs in Silver Spring and the surrounding area."