It's a long way from Silicon Valley to Baltimore, but an increasing number of entrepreneurs from the California electronics center--and other high-tech bases around the country--are making the trip.
They're coming to the venerable East Baltimore Street headquarters of Alex. Brown & Sons, the 183-year-old investment banking firm that started out bankrolling cotton traders and is now financing computer and biotechnology companies.
Long active in backing growth companies, Alex. Brown has moved in recent months into the volatile venture-capital field, assembling a $30 million venture-capital fund, and has invested the money in about two dozen start-up companies around the nation. Pleased with the experience, the firm plans to start another later this year.
The closely held firm sees the venture-capital move as a logical extension of a business that includes corporate finance, retail stock-brokering, and most other features of a large-scale brokerage house. Alex. Brown officials say the firm is now able to provide financial services for each step of a company's growth, from providing seed money through the venture-capital fund to taking the company public and selling its stock.
Officials of the firm believe its venture-capital emphasis complements an expertise in investment banking already geared toward small to medium-sized growth companies.
"The firm has had a history as an investment banker of working with growth companies," says Donald B. Hebb, the partner in charge of corporate finance, which includes the venture-capital effort. "Venture capital really is a logical extension, if you will, of our involvement in the growth-company marketplace."
Growth companies, Hebb adds, "are an important place for people to have their money invested because they offer people growth for their money in an economy that's not otherwise robust."
The firm's growing interest in high-tech financing is not limited to the California hotbed. It is also active with companies in Texas and the Boston area, and Alex. Brown executives say the company is handling a growing list of clients in the Baltimore-Washington corridor as high-technology companies gain hold around the Beltway and elsewhere in the area.
In the process, Alex. Brown is shaking its reputation as a stodgy regional brokerage house and replacing it with an image as one of the three major high-tech investment-banking firms, along with Hambrecht & Quist Inc. of San Francisco and L. F. Rothschild, Unterberg, Towbin of New York, according to others in the industry.
Alex. Brown has been arranging seed money for businesses since shortly after it was founded as a trading company by an Irish immigrant in 1800. The senior Brown later brought his four sons into the business, but three spun off branches of the family company and became successful investment bankers in their own right: two founded Brown Brothers Harriman & Co. and the third opened Brown Shipley & Co. in London.
The firm's famed fleet of Baltimore Clipper sailing ships eventually gave way to the merchant banking side of the business, which arranged early financing for the Baltimore & Ohio Railroad and, in this century, set up a public-revenue financing scheme for Maryland's system of state tollroads and bridges.
The firm balanced its conservative investment work in public finance and financial-institution financing with an interest in more flighty growth companies, at the same time building up a lucrative retail brokerage business that now accounts for around half of the company's revenues. Alex. Brown officials will not reveal financial details about the firm's size, but it has nearly 1,000 employes at 22 offices throughout the country.
Alex. Brown's interest in start-up companies dates even further back than its participation in the founding of the B&O, and includes such 1960s stars as the Rouse Co., the Columbia-based city and shopping-mall developer.
Several years ago, the company's interest turned to the high-tech field. Part of the reason for that focus, according to the firm's managing partner, F. Barton Harvey Jr., was a desire to find an industry sector for Brown to serve as an alternative to more traditional "smokestack" industries, which usually took their investment banking business to New York houses.
"There was no need for them to go public through a regional firm or a firm outside New York," Harvey says of those companies.
Nascent high-technology firms, on the other hand, were having trouble getting financing from conservative New York investment bankers, who often didn't understand the new technology.
This was a boon to regional investment bankers like Hambrecht & Quist--which financed many of Silicon Valley's growing companies--and to Alex. Brown. Despite the cultural differences between avocado aficionados and crab-cake consumers, Alex. Brown had little trouble drumming up business in the high-tech centers, and its officials say there's nothing unusual about a Baltimore firm providing investment-banking services for companies in California, Texas or Massachusetts.
Alex. Brown also saw the high-tech investment business as a way to improve its visibility and reputation in the exclusive, pin-striped and mostly New York-based world of investment banking.
"There's a definite New York syndrome," Harvey says. "We feel our guys are just as bright in the corporate finance area as the New York ones. Our guys have gone to the same schools."
Alex. Brown's efforts in high-tech included the formation of research groups specializing in four high-tech areas--telecommunications, health care, software and microelectronics.
The firm focused on those areas for a variety of reasons: software was chosen, for instance, because the firm felt the computer hardware market was becoming glutted while the software business was growing rapidly. Telecommunications was picked in part because of the growing number of telecommunications companies sprouting in the Baltimore-Washington area, but also because it is in an industry going through a great deal of change as the result of the impending break-up of the Bell System.
"A lot of the interesting venture opportunities grow out of changes taking place in an industry," Hebb says. "Those are the kinds of situations you like to find that can explode into a big company in a hurry."
Alex. Brown started out offering investment banking services to fledgling high-tech companies, but it would help them find other sources when they were looking for venture capital. The firm decided last year, however, to grab a piece of the venture-capital action for its own.
The venture-capital fund set up last fall gathered funds invested by about 10 major institutional investors, such as pension funds. As with all venture-capital investments, these investors aren't expecting any short-term return of any kind--not even dividends. But if the companies in which the fund has invested prove out, the investors will receive stock in the new companies.
Hebb says Alex. Brown has had no trouble finding companies to invest in. It has found them through its research department, through referrals and, in some cases, because of its involvement in other deals.
Three different Dallas medical-service firms the fund has invested in can be traced to Alex. Brown's participation as investment banker in the acquisition of another company, Hospital Affiliates, by Hospital Corp. of America in 1980. Three different groups of Hospital Affiliates employes went out on their own to form the new companies, and came to Alex. Brown for help. In another instance, a director of a start-up company in the electronic-warfare field steered the new concern to Alex. Brown because the firm handled the sale of his company to Comsat.
In a typical venture-capital deal, the investor receives an equity position in the new company in return for the capital invested. Acting as an investment banker, Alex. Brown might later be involved in the issuance of stock in the new company.
It's a risky business: most fledgling companies never get off the ground. But those in the venture-capital business always hope that they're backing the new IBM or Xerox--the kind of company whose success can pay for an awful lot of failures.
Alex. Brown officials say it's too early to assess the success rate of its venture-capital investments. "We don't have any sick puppies that we know of yet," Hebb says, "but surely there are going to be companies that don't perform according to plan."
Harvey says that although some of the companies for whom Alex. Brown helped put together venture-capital deals before the firm began offering the service itself have foundered, most are either still going concerns or have been bought out by competitors. "On an overall basis, the record is excellent," Harvey says of the firm's experience with new companies.
Competitors confirm that, saying that Alex. Brown has been remarkably free of the kind of spectacular flops that have marred the records of many other firms involved in the business of getting new companies on their feet. And Alex. Brown gets high marks from competitors for all other aspects of its investment banking and brokerage business.
But one competitor, asking anonymity, suggested that Alex. Brown's venture-capital fund may be taking a few too many risks with unproven technologies. "They may be financing too many companies that are not completely proved out," says this source, who otherwise has nothing but praise for the firm. "But the answer to that one can only come later."
While the nationwide scope of Alex. Brown's work in venture capital and with growth companies has belied its reputation as a regional firm, its executives say they expect to do more business with fledgling companies in the Baltimore-Washington area in coming years. Only about 10 percent of its venture-capital investment has been in local companies.
"We think from a geographical point of view, we'll probably end up doing a lot more business closer to home in the future than we have in the past," Hebb says. "I'd be disappointed if this isn't an active area for us down the road."
Hebb says that local venture-capital investors can be better-suited for smaller, riskier companies that might be less attractive to out-of-town investors. But he also says that it's getting harder to keep new local companies from seeking national financing, as big venture-capital companies discover the Baltimore-Washington area.
"A company in D.C. that's got good prospects is going to be able to get financed from New York or California or Baltimore," he says. "A clear winner, anybody is going to back."