Lost in the ballyhoo over America Online Inc.'s $435 million purchase of Advertising.com Inc. is that AOL's cash has delivered the first major payday for a local venture capital investment since the tech bubble burst.

Grotech Capital Group and New Enterprise Associates, the region's biggest venture capital firms, each bought about 1.3 million shares in Advertising.com in two rounds for a total of about $6 million each. These two firms will walk away with about $50 million each after the AOL deal closes.

Baltimore-based Advertising.com sells an online advertising system in which the advertiser pays only for results. Advertising.com determines the best place and play for an online ad, and its clients pay if a potential customer clicks on the ad and responds in some concrete way to create a sales lead.

It was founded in 1998 by brothers Scott and John Ferber. Scott was a business manager at McLean credit card firm Capital One Financial Corp.; John was a Towson University grad who had developed the original software to track online ad viewing. Scott, the chief executive, is 35. John is 30.

Advertising.com pulled in $132 million in revenue and had $18.7 million in profit in 2003. It also had growing cash flow from its operations for two years. Its business model was creating money, so America Online, the Dulles-based Time Warner subsidiary, which had been an investor in one of Advertising.com's earlier venture rounds, offered to buy the company for $40 a share -- about $435 million -- in cash.

The biggest winners in the deal are the Ferber brothers, each of whom owned 19 percent of the company. They will each walk away with more than $70 million for their stock. They had sold the rest of the company for $66 million in two venture rounds, in 1999 and 2000.

In 1999, the company desperately needed working capital. Web sites were demanding payment the minute an ad was posted, but Advertising.com didn't get paid (if it got paid) until the ad was acted upon by a consumer.

"We started out in 1999 thinking we should raise $500,000," Ferber said. "But the business was growing so rapidly we decided to go for big money." Ferber hopped on a plane to Silicon Valley and started cold-calling the big venture capital firms. The trip was fruitless, except that every one of them told him to go home and raise money here.

".'Why are you here?' they asked me. What I learned was that no one in California would invest unless someone in my hometown invested first," Scott Ferber said. He had never heard of Grotech or New Enterprise Associates, even though his father had worked as an accountant for Frank A. Bonsal, the co-founder of New Enterprise, 30 years earlier and had remained close to Bonsal, 67.

Jonathan R. Wallace, founding partner of WWC Capital Group in Reston, introduced Scott Ferber to Bonsal. Ferber had hired Wallace in 1999 to help him arrange venture financing. "Thank gosh for John Wallace," Ferber said. "He earned every penny we paid him."

Ferber said Wallace also introduced him to Grotech's Patrick Kerins and Timothy Schigel of Blue Chip Venture Co. in Cincinnati, and negotiated that first round of venture capital, which involved New Enterprise, Grotech and Blue Chip.

Wallace, who is raising a new $50 million early-stage fund, describes Advertising.com as "operating at a very low level" when he first met Scott Ferber in 1999. Until that time, the company was largely run by John, but Wallace said Scott had begun to apply his analytical and marketing skills, acquired at Capital One and Procter & Gamble before that, to ramp up the company's business plan. "There was 10 people crammed into the basement of a Timonium townhouse," Wallace said of his first visit. "But that quickly changed."

The company raised $9 million during the first round of funding in 1999 and clinched another $57 million round in the summer of 2000, when the dot-com boom was fizzling. Grotech and New Enterprise were big participants in the second round. There were also a number of smaller investments by Blue Chip, London's RVC Greenhouse Fund, WorldCom Inc., AOL and advertising conglomerate WPP, according to Scott Ferber.

In addition, Maryland's Department of Business and Economic Development invested $500,000 in the company in March 2000. The state will make $1 million from the investment.

Grotech's Kerins and Arthur J. Marks, New Enterprise's senior technology partner at the time, joined Advertising.com's board in 1999, although Marks later quit in 2001 when he left New Enterprise to start his own firm, Valhalla Partners, with veteran tech VC investors Hooks Johnston and Gene Riechers.

Bonsal took Marks's place on Advertising.com's board, but he said his input into the company's operations was minimal. "Marks was Internet literate," Bonsal said. "I'm just a farm boy. But it didn't matter much. I just went to meetings. We knew they had a management team that could ride through the bubble. And the fundamental business was very sound."

Grotech, a younger and smaller shop than New Enterprise Associates, has been one of the more prolific VC investors in this region. The Timonium-based company focuses on the Mid-Atlantic and the Southeast. It has a bevy of successful non-tech investments -- FTI Consulting Inc., Lloyd's Barbecue, the Chicken Out Rotisserie takeout chain -- but has not had many home runs in the tech arena in recent years. One of its biggest tech deals, 1998's USInternetworking Inc., went through Chapter 11, and most of its equity wound up in the hands of Bain Capital LLC.

"It feels great," Kerins said of the Advertising.com deal. Kerins said Advertising.com, more than the other tech companies in his investment portfolio, cut costs quickly and deeply after the Internet advertising market crash.

Employees will also benefit from the AOL sale. The company had 2,852,889 shares tied to options and warrants outstanding on March 31, with an average exercise price of $7.39 a share, most belonging to the company's 315 employees. W. Gar Richlin, Alex. Brown's one-time investment banking chief who the Ferbers brought in in 2001 to be a gray beard chief operating officer, has more than 550,000 options with a $6 strike price, worth $18.7 million.

A Piece of the Rock

DiamondRock Hospitality Inc. will close out its fundraising this Wednesday, according to sources familiar with the deal, raising about $200 million to create a new real estate investment trust to buy Marriott hotels.

The Bethesda company was created in May by a group of former Marriott International Inc. executives led by chief executive William W. McCarten and president and chief operating officer John L. Williams. The $200 million is being raised from a group of institutional investors put together by Friedman, Billings, Ramsey & Co. Marriott International will own about 8 percent of the company, but won't have a board seat, according to one source who agreed to speak on the condition he not be named.

The investors have registration rights, meaning that DiamondRock agreed that within nine months it will register their shares with the Securities and Exchange Commission for public sale. Marriott has agreed to give DiamondRock a "first look" at hotels it knows would fit DiamondRock's investment strategy. Diamond plans to buy Marriott hotels as well as non-Marriott hotels that it can convert to Marriott-managed properties.

This will be the second real estate investment trust formed to own Marriott hotels. Marriott created Host Marriott Corp. in the early 1990s; it is the largest hotel REIT. Last year Host Marriott renegotiated a raft of management agreements with Marriott and ended its interlocking directorships with Marriott. Spokesmen for Marriott and Friedman, Billings declined to comment. A person who answered the phone at DiamondRock's offices -- the company is leasing space inside Marriott's headquarters on Fernwood Road in Bethesda -- declined to comment.

Terence O'Hara's e-mail address is oharat@washpost.com.