The Washington region’s start-up community has churned up investment dollars in big doses lately as entrepreneurs launch companies that look to shape industries as varied as childhood education, retail marketing and energy consumption.
There was $125 million for Herndon-based education provider K12. The District-based daily dealmaker LivingSocial fetched $400 million. Arlington-based energy conservation company GridPoint took in $23.6 million.
The deals have made headlines not just for their size, but for what they may signal: a new wave of funding after the economic downturn punctured a hole in the venture capital markets and made money harder to come by.
Firms that could promise big, and especially immediate, returns on investments were never completely shut out. But there were few financial backers with an appetite for risk and the means to make new investments.
That’s beginning to change. Not only are traditional venture capitalists dipping their toes back into the market, but new financiers have emerged with a desire to find businesses with growth potential and help push them to market.
Angel investors, corporations and private equity firms were never idle on the sidelines, but their roles in some instances are different and more pronounced after the country’s worst economic slump in decades.
The need for seed and early stage funding has become more prominent post-recession. Many venture funds shifted their focus to more mature companies because the investments were likely to see quicker returns.
The resulting void has been filled in part by what many say is a rise in the role of angel investors, both as individuals and groups. They inject smaller amounts of money, typically less than $1 million, early in a company’s life cycle.
“Venture capital has a moment when it really is important, but it’s not for everybody,” said Julia Spicer, executive director of the Mid-Atlantic Venture Association. “There are also times when a company may need just an angel infusion of capital.”
The smaller investors have been able to play a larger role in part because the costs of launching a technology start-up are lower than during the dot-com boom of the 1990s.
“The actual overhead in starting one of these companies is probably less than it ever has been, which means you don’t necessarily need the huge enormous rounds day one,” said John Taylor, vice president of research for the National Venture Capital Association. “These start-ups are more accessible to the angel community because the economics fit better.”
Taylor said the later end of the venture capital spectrum— meaning the money that’s invested as companies expand and near an exit, whether with a deal to sell the company or to take it public — has seen bigger changes. In fact, the association recently added once-nascent investor types to its quarterly venture capital reports because they’re wielding more influence.
For example, the association now includes investments funneled from one company directly into another, typically as part of a strategic partnership or other investment agreement.
Amazon’s $175 million investment in LivingSocial toward the end of last year serves as one of this region’s most prominent examples. The figure wasn’t recorded by NVCA previously because Amazon did not meet its definition of an investor.
Corporate investments differ in that companies typically look at how an investment might enhance their mission or bottom line, as opposed to just assessing whether the prospects are right to cut a check.
“As it relates to Amazon’s investment in LivingSocial, I think both companies saw a lot of areas where they could cooperate and work together, and that was equal in value or greater than the financial side of it,” said Don Rainey, a general partner at Grotech Ventures and an early investor in LivingSocial.
“Let’s say that Amazon has a very large customer base in North America for which they have e-mail addresses, and LivingSocial makes a big part of its business on e-mail addresses,” Rainey said. “That could be a big deal if LivingSocial were ever able to benefit from the asset.”
Chevy Chase-based Travel Channel made a similar decision when it pumped $7.5 million into Oyster.com, a travel review Web site based in New York. Travel Channel aims to morph its Web site into a place where you can research and book vacations, so President Laureen Ong saw the deal as a significant step into that market.
“We’re going to probably build tremendous value for their business,” Ong added. “If you’re going to put that kind of effort into it, I don’t want to just be a passive marketing partner. I want to have more skin in the game on this one.”
Both Spicer and Taylor said that trend could persist. Many corporations have amassed large piles of cash after cutting expenses and saving money during the economic downturn. While they’re using that money to buy back stock or make strategic acquisitions, investments are also part of the mix.
“That cash on the balance sheet they’ve been holding [will allow] many of them to now take their company to the next level,” Spicer said. “That may mean they’re ready to buy product or they may want to make a strategic investment, but they’ve got cash on the budget sheet to do that.”
Some private equity players are also flush with cash. District-based Carlyle Group, for example, surpassed the $100 billion mark in assets under management for the first time last month. That figure includes the value of its investments and money ready to deploy.
All that cash has resulted in bigger, bolder deals being closed by such firms. In this region, that’s been evident in the government contracting community. Private equity firms have closed a number of deals in recent months, including Fairfax-based SRA International and McLean-based Global Defense Technology & Systems.
ATS Corp. Chairman Ed Bersoff said private equity has long looked to government contractors as a sturdy investment with predictable cash flow. But the deals have gotten bigger of late.
“The valuations come and go based on is there something better to invest in,” he said. “But they always keep coming back to this industry because the track record has been so good over the years.”