Region's Venture Capital Rank Slips
Area Overtaken by Northwest, San Diego

By Zachary A. Goldfarb
Washington Post Staff Writer
Monday, March 24, 2008

Regions of the West Coast and Midwest moved ahead of Washington as top destinations for venture capital in recent years, as the local venture economy grew more slowly than the national average, a Washington Post analysis shows.

In 2001, the year the technology bubble popped, Washington ranked sixth among top destinations for venture capital, after Silicon Valley, New England, the New York metro area, Texas and the Southeast. Last year, it was ranked 10th, overtaken by the Northwest, San Diego, the Midwest and Los Angeles/Orange County.

The average amount of venture capital invested across the country grew from $1.2 billion in 2002 to $1.6 billion in 2007, an increase of 33 percent. By contrast, investment in the Washington region increased in the same period to $1.24 billion from $1.1 billion, a jump of 13 percent.

Mark G. Heesen, president of the District-based National Venture Capital Association, said that Washington's sizeable telecommunications industry has never fully rebounded from the bust, while growth in life sciences and environmentally friendly technology, known as cleantech, has propelled other regions.

"The telecommunication investment levels have not rebounded in the same manner that [information technology] and life sciences have," Heesen said. "More of our companies were telecommunications-centric than many other parts of the country. . . . It's just taken a longer period to lick your wounds and get back on the horse again."

The data were provided by PricewaterhouseCoopers and the National Capital Venture Association, based on Thomson Financial data. The Washington area refers to the District, Virginia, Maryland and West Virginia.

Even if recent years showed more modest venture growth, over the past decade the Washington region has grown robustly.

In the early 1990s, economic development officials like Gerald Gordon tried to persuade venture capitalists to come to Washington.

"It became clear that one of the things retarding growth of companies in this whole region was the absence of venture capitalists," said Gordon, chief executive of the Fairfax County Economic Development Authority. "We went and talked to venture capitalists in Boston, New York and California, and we got the same answer about D.C.: 'That's a government town.' "

The tech boom of the late 1990s and early 2000s brought countless venture firms to the region. When the tech bubble burst in 2001, venture capital investment fell by half or more.

Since then, Washington has sustained a diverse base of companies built up in the boom years. Even if other areas were growing at a faster clip, Washington maintained a healthy number of deals -- about 200 per year -- comparable to the average of other regions.

"It's really much more of a balanced town than it used to be," said Roger Novak of Bethesda's Novak Biddle Venture Partners, one of the largest local venture capital firms. "The Internet and telecom continue to move ahead. You had companies that grew up like AOL and Blackboard that are spawning other companies."

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."