A massive investment in a Reston information technology firm propelled Fairfax County into venture capital's big leagues, with venture funding outpacing that of all but a handful of states.
More than $230 million was invested in Fairfax firms in the first half of the year, already well above the $187 million invested in all of last year, the previous high mark, according to the Fairfax County Economic Development Authority.
The Fairfax total was boosted chiefly by $128 million in new capital for Via Net.Works, a two-year-old Reston firm that focuses on providing Internet service to mid-size businesses in Europe and Latin America. It was the single biggest venture-capital investment in the United States in the second quarter, according to Kirk Walden, director of the MoneyTree Survey, PricewaterhouseCoopers's quarterly study of venture funding.
Economic development officials said the numbers demonstrated the growing influence of venture capital in the region. Gerald L. Gordon, president of the county's economic-development authority, said that as recently as 1996, "if you look at all the venture-capital deals in the U.S., less than one-half of 1 percent of them were in Fairfax. But by 1998, if you ranked the deals by locale, Silicon Valley [in California] was first, Boston was second and Fairfax, third."
Measured another way, Gordon noted that "two years ago there was one venture-capital firm in Fairfax; now there are 17. They take the high-risk projects that banks won't take."
The majority of the venture funding through June came in the second quarter. A total of nine Fairfax firms received $185.7 million in new funding in the three months ended June 30, according to figures compiled by Pricewaterhouse and the VentureOne research group.
The second-quarter Fairfax total was larger than that invested in 42 states, according to Pricewaterhouse. The Fairfax sum represented 87 percent of the Virginia total and was higher than amounts invested in such places as Maryland ($71.4 million), the District ($62 million), North Carolina ($163 million), Georgia ($160 million) and Pennsylvania ($64 million).
The clear national leader was California, with $3.5 billion in new investments, followed by Massachusetts, with $892.1 million, and New York, with $391.9 million, according to MoneyTree.
Venture capital has been the lifeline for local start-up technology firms in recent years, many of which are located in the 15-mile Fairfax corridor that runs from Tysons Corner past Reston to the Dulles International Airport area. These firms often have been created by an individual or a small group of people with a unique idea but little in the way of capital to make it a business. As a result, venture-capital firms and individuals have jumped in to provide seed money in exchange for substantial ownership shares and seats on company boards.
Such is certainly the case in Fairfax, where all but one of the companies that received venture-capital infusions in the second quarter were technology firms. The exception was American Health Sciences Inc., a McLean firm that manufactures vitamin supplements and sells them through physicians' offices. It received $2.6 million in new funding.
Aside from the investment in Via Net.Works, venture capitalists handed $13.9 million to MainControl Inc., a Vienna firm that makes software to help companies keep track of their computing equipment; $11.9 million to WebMethods Inc., a Fairfax firm that makes software that lets companies with differing computer systems communicate via the Internet in real time, and $10.6 million to LifeMinders.com Inc., a Herndon firm that sends Internet messages to people who want to be reminded about things they need to do or relatives' birthdays and anniversaries.
Via Net.Works was founded in Colorado, but chief executive David D'Ottavio said the firm moved to Reston in May 1998.
The firm does no business in the United States, he said, but needed an East Coast location so its officials could be within a few hours by plane of its operations in Europe and Latin America. As a result, Dulles has become a second home for the firm's managers.
D'Ottavio said his firm has raised a total of more than $180 million in private capital and plans to use the latest cash infusion to expand its Internet services in the major commercial areas of Europe and Latin America. He declined to specify where, saying that the information was proprietary and that the business of providing more Internet service overseas was "highly competitive." In addition to providing Internet service, he said, the firm designs Web sites, advises companies on electronic commerce and has created portals in Spanish and Portuguese.
D'Ottavio said the firm has no plans to go public.
"We've tried to be as quiet as possible and we've succeeded pretty well," D'Ottavio joked. "We're either on a plane or in some foreign location."
Among its investors are Norwest Equity Partners, HarbourVest International, Boston Millennia Partners, Verio, Providence Equity Partners, BCI Advisors, First Union Investors, Crescendo World Fund, Bessemer Ventures, Chase Capital Partners, Norwest Venture Partners and Rho Management.
Pricewaterhouse said venture-backed investments throughout the United States hit a record $7.67 billion in the second quarter, easily surpassing the $4.31 billion first-quarter total. The April-to-June total was up 104 percent over the $3.77 billion figure recorded in the same period last year.
The number of companies receiving money jumped 30 percent, to 992 from 763 a year ago, and the average funding per company increased to $7.4 million from $4.9 million a year ago.
James D. Atwell, managing partner of Pricewaterhouse's venture-capital practice, said, "We expected investments to grow, but the magnitude of the increase is absolutely stunning. Technology in general, and the Internet in particular, are entirely responsible for the leap.
"All the stars were aligned in the second quarter: a solid economy, a favorable [initial public offering] market and a strong stock market," Atwell said in a statement analyzing the MoneyTree findings. "That combination resulted in a level of investment that is not likely to be eclipsed in the near future."
Gordon said Fairfax venture funding also may not continue to rise indefinitely, but added, "At the moment there's more money out there than there are deals."
While venture-capital investment in California far outpaces that in the D.C. area, this region's growth rate was much higher last year than Silicon Valley's . . .
Percent change in venture-capital funding, 1997-98
D.C. Metro 89%
New England 49%
Silicon Valley 29%
. . . and this year, Fairfax County is enjoying another year of rapid growth, with venture capital up 23 percent since 1998 -- only halfway through the year.
Venture-capital investment in Fairfax County (in millions)
SOURCE FOR CHARTS: PricewaterhouseCoopers