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Crisis Mode: Less Ventured

"We're still looking for deals, but it has to be really cool, breakthrough stuff," said Jack Biddle, general partner at Novak Biddle Venture Partners.
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By Kim Hart
Monday, October 27, 2008

For many local tech companies, it's feeling a lot like 2000 all over again. The Nasdaq is down, funding has dried up and entrepreneurs are hunkering down for a long winter.

It's not that venture capitalists aren't busy -- they're busier than ever. But they're spending less time investing in new deals and more time focusing on the start-ups they've already made big bets on and coaching companies to conserve cash.

"VCs have to be very careful and realistic, and entrepreneurs have to understand that getting that next round of financing is not automatic," said Mark G. Heesen, president of the National Venture Capital Association, based in Arlington.

Two sets of data on venture capital investments released this month showed a drop in dollars in the third quarter, and industry veterans expect the trend to last well into 2009.

In the Washington area, $189 million was raised in 45 venture-capital deals, a 13 percent decrease from the $217 million raised in 50 deals in the second quarter. Compared to the same period last year, third-quarter investments dropped by 46 percent, according to the MoneyTree Report on quarterly venture financing by PricewaterhouseCoopers and the NVCA.

Dow Jones VentureSource, which includes private-equity deals in its report, shows Washington area companies raised $264 million in venture capital during the third quarter, which was about 27 percent -- or nearly $100 million -- less than in the same period of 2007.

Nationally, venture-capital investment declined 7 percent to $7.1 billion, compared to $7.7 billion in the second quarter, according to the MoneyTree Report.

Local investors insist they're still open for business, but they have to be much more selective about funding new deals.

"We have the capital, we have the appetite, but we don't have the bandwidth," said Jack Biddle, general partner at Novak Biddle Venture Partners in Bethesda.

Venture-capital investors often become active advisers to start-ups receiving money, guiding the business as it grows. But the credit crisis has made it more difficult for start-ups to go public or be acquired by larger firms -- the main ways venture capitalists get their money back to make new deals.

So many investors are still tending to companies they had hoped would be on their own by now.

At Novak Biddle, for example, each partner is now an adviser to about 10 firms, twice as many as usual. The firm was among the most active during the quarter, participating in four deals, including a $10 million investment in Appian, a nine-year-old software firm.


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