In the first six months of this year, the most active venture capital investor in the mid-Atlantic region completed 23 deals in the Washington area. The source of the funding wasn't a high-flying investment fund with money to burn or a roll-up firm looking for bargains, as it might have been four or five years ago.
It was Maryland's Department of Business and Economic Development, infusing the state's start-up companies with enough capital to stay afloat for a few more months or to complete the next step in product development.
Washington's technology scene is coming out of the hibernation induced by the recession and the bursting of the dot-com bubble. Industry veterans say there is no shortage of enthusiastic company-builders in the region. But the entrepreneurs and start-ups emerging today find themselves in an environment different from that during the boom.
Companies can no longer hope to be handed millions of dollars for vaguely formulated business ideas. Instead they are turning to government programs like the one in Maryland that arm them with grants averaging $100,000.
Many of today's local start-ups aim at markets that only five years ago were considered boring, such as the federal government. The products and technologies at the core of this generation of companies share a single characteristic: utility. Entrepreneurs say they're being asked to prove that what they're selling will help their clients save money, make more of it or protect valuable assets.
And while the pace of dealmaking has slowed, so too has the pace of company development. Start-ups are less likely to rush to market with half-finished products just to beat competitors. Those venture-capital firms that are still investing say it's no longer reasonable to expect the big payoff of an initial public offering or a sale in two or three years.
But while the promise of rapid exits has faded, the dot-com layoffs created a pool of talented people willing to work at reasonable salaries.
There are still customers for technology and investors for specific types of businesses.
"I was concerned when we went through the Internet bubble-burst and the telecom bubble-burst that we'd been dealt a very serious blow that we would not recover from," said Peter J. Barris, managing general partner of New Enterprise Associates, one of the area's oldest and largest venture capital firms. "But I've seen a culture that was created over the last decade that has gone through the bubble and has not been killed off. It's actually showing some good signs of life."
Venture firms such as New Enterprise still have plenty of money, but early-stage companies no longer have easy access to it. Investors are nursing companies already in their portfolio and are looking for less-risky deals in tech firms that have made headway developing products and selling them. So more companies are turning to government grants and loans.
Richard M. Tworek started putting out feelers for venture funding soon after he started a software company called Qovia in June 2002. He had 17 years of experience in the business, a talented chief technology officer and a plan to create technology that would make Internet telephone systems work better.
But the information technology industry had just been through what Tworek calls its "nuclear winter." The response he got was clear: Come back when you have a product, customers and revenue.
To keep his company alive, Tworek had to use a warehouse as an office and ask his early employees to work for months without salaries. He stretched a $100,000 grant from the state of Maryland for nearly a year -- long enough to allow Qovia to create a product, attract customers and start collecting revenue.
"You could almost think of us as angel investors. We're filling that niche," said Christopher C. Foster, deputy secretary of the state economic development department.
Maryland's grant program received about 350 applications from companies like Qovia last year. Other entrepreneurs turned to the federal Small Business Innovative Research Program, which gives $100,000 to $750,000 to small companies developing new technology. In 2003, 364 companies in Virginia received money from the federal program, compared with 241 in 1999. The number of grants to Maryland companies increased to 325 in 2002 from 243 in 1999.
It was October 2003 before Qovia landed $5.5 million in venture capital funding. Six months later it got $10.6 million more. Venture capitalists say it is companies at that stage, having established track records, that attract the attention of investors today.
Though local venture funding in the second quarter this year was less than at any quarter since 1997 -- 43 companies got a total of $132.4 million in funding -- there is little doubt that area firms still have money to invest.
From 1995 through 2003, about $15.16 billion in venture funding was invested in local companies, but venture firms in the Mid-Atlantic region raised funds totaling $19.8 billion. While some of the money was invested elsewhere, most venture capitalists say they prefer good deals in their backyards.
Nationally, $65 billion in venture funding that had been raised nationwide had yet to be spent at the end of March, according to Thomson Venture Economics. Venture capitalists say they are still looking for promising companies, but they're not willing to gamble on untested business plans.
"For a very small number of the hottest deals, which may or may not be the best deals, there is still a high level of competition," said Gene Riechers, a general partner at Valhalla Partners, a Vienna-based venture fund. But the atmosphere is much more rational than it was during the bubble, he said. "We've returned to more appropriate behaviors in the region, with the amount of money that's invested, the valuations of the companies and the expectations of how long it will take to build a business."
More than the venture capitalists have changed. Today's companies are less glamorous than those that succeeded during the 1990s. They're also more narrowly focused than some of the big-idea start-ups that failed when the dot-com bubble burst, such as CareerRewards (paying people to refer job candidates) and LifeMinders (sending e-mail reminders to help people keep track of their busy lives.)
Of the 18 local tech companies that held initial public offerings of stock from 2001 through 2003, seven were government contractors, a trend that did not go unnoticed by local entrepreneurs. Workshops on how to sell products and services to the federal government have become some of the most popular tech events in the area, as young firms angle to capitalize on increased defense spending and get a piece of the post-9/11 homeland-security sector, projected to have a $33 billion budget for 2005.
"Companies are very pragmatic, they go where they can sell," said Peter Jobse, president of Virginia's Center for Innovative Technology. "You can almost hear the stampede as you lay in bed at night as [start-ups] cross from the commercial side to the federal side."
Sid Banerjee wasn't always planning to become a government contracting executive. In the summer of 2001, Banerjee and a fellow veteran of MicroStrategy Inc. -- a business software company that rose to prominence in the late 1990s, but was later shaken by accounting irregularities -- left to start their own firm, Claraview Inc. They were unsure of what markets would be best-suited for the data-mining software they intended to develop. But after Sept. 11, 2001, Claraview executives decided they might be able to make money and accomplish some good by selling their technology to agencies that track terrorists.
"A lot of the rhetoric following the attack was about how we could have predicted or prevented that attack," Banerjee said. It was more difficult than Claraview expected to break into homeland security, but the company has made progress with other agencies, including the Education Department and the Federal Election Commission, and it has survived without outside funding.
Executives of companies still selling to the commercial markets say they continually have to prove that their offerings are not just technologically intriguing but necessary to attract customers and money.
Not long after D.P. Venkatesh decided to start a company in May 2000, he realized novelty alone wouldn't take him very far in the area's telecommunications industry. As his start-up, Vienna-based MPortal Inc., developed software to deliver data to wireless devices, Venkatesh began looking for customers. He said he encountered one sentiment again and again. "We're not really interested in the latest technology," he recalled of the response from cellular carriers. Their sole concern, he said, was "how can we increase their revenue."
So MPortal broke from the traditional software sales model and brokered per-use royalty deals that pay only when its product is used to download games or manage text message deliveries. The company may never reach the high-profile status of early start-ups, Venkatesh acknowledged, but it survived the downturn and eventually landed $12 million in venture funding. "It's not that we didn't dream big, but we wanted to build a foundation first and then scale the market."
Entrepreneurs say that in some ways, the post-bubble era has been a good time to build companies. Without investors pushing for quick exits or packs of competitors vying for the same markets, start-up executives say they have more time to fully develop their businesses.
Smart workers are abundant and dedicated. Because so many local tech workers lost their jobs in 2001 and 2002, those who did have jobs worked hard to keep them, said Paul Villella, chief executive of HireStrategy, a Reston staffing firm. More candidates lined up for each available job, and many were willing to take pay cuts just to get regular work.
"A lot of companies that were surviving or doing well during the downturn, they had sort of the pick of the litter," Villella said. "The control went right back in the hands of the employer."
Nor are tech workers defecting for every new job opportunity that comes along.
Matthew Calkins was intent on building a stellar staff for Appian Corp., the business software company he founded in 1999. So he interviewed every employee who came on board and focused on recruiting graduates of Ivy League colleges and other top universities. Now he has 175 employees.
Calkins polls his employees every year to gauge their attitudes. The most telling result, he said, was that when they were asked if they plan to be with the firm in five years, "overwhelmingly, 50 percent or more say yes."
Although the company started when the tech boom was going strong, Calkins said he built it gradually and without venture capital "to have a degree of self-reliance." Now, in tune with the times, he said he remains wary of rapid-fire expansion even though Appian's annual revenue is $24.6 million.
"The market is still tiny. I want it to grow and us to grow with it," he said. "I don't want to grow any faster than our culture can assimilate."
That's important because Calkins, like many of the entrepreneurs who emerged after the bust, said he's intent on building a company that will be around for years to come.
"This is one of my least favorite things about start-ups," Calkins said. "They all act as if the world is going to end in two years."