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D.C.-area technology investment soared in 2017, but early-stage firms still struggle

Green Leaf Medical CEO, Philip Goldberg, second from right, and his brother and general council, Kevin Goldberg, right, inspect the marijuana plants as they walk through one of the flower rooms at Green Leaf Medical in Frederick, Md.
Green Leaf Medical CEO, Philip Goldberg, second from right, and his brother and general council, Kevin Goldberg, right, inspect the marijuana plants as they walk through one of the flower rooms at Green Leaf Medical in Frederick, Md. (Ricky Carioti/The Washington Post)

Venture capitalists poured $1.55 billion into D.C. area technology start-ups last year, an industry report found, as a handful of so-called megadeals propelled the region to a six-year high for technology investing in 2017.

The influx of new money is seen as encouraging to local technology entrepreneurs, who have long complained that they are held back by a relative dearth of investment dollars.

The District's 2017 investment haul was still dwarfed by other technology hubs. According to data compiled by the National Venture Capital Association and PitchBook, start-ups in Boston collectively took in $8.7 billion last year, for example. The money that is flowing into the Washington area is going to fewer and fewer companies each year, making life hard for promising early- and mid-stage tech start-ups.

Still, the latest numbers suggest the area is starting to close the funding gap with competing technology hubs, with the total amount of funding 25 percent above it was in 2016.

The new companies attracting funding come from a remarkably diverse range of industries, suggesting the regional economy could one day grow beyond its storied dependence on the federal government.

The report's authors say they see no signs of a bubble.

"While the figures are comparable to the dot-com era, the [venture capital] ecosystem appears healthy and driven by different dynamics," John Gabbert, CEO and founder of PitchBook, said in a release.

The largest new funding round was $164 million for Washington-based MapBox, a start-up that provides data analysis and visualization for mapping services. That money came from a cadre of technology venture funds including SoftBank, the massive investment group owned by Japanese billionaire Masayoshi Son.

Also in the District, a credit card and lending start-up called FS Card brought in $40 million to fuel its efforts to expand lending to a broader pool of recipients.

In Bethesda, a health-care consulting group called Aledade led the charge among the city's long-thriving community of health technology firms, raising just over $63 million. Aledade partners with a growing industry of "accountable care" organizations, health-care organizations that blur the lines between those who pay for health care and those who provide it.

The legal marijuana industry also took its place in the Maryland start-up community, more than four years after the state legalized the drug for medical purposes. Gaithersburg-based Green Leaf Medical, one of 14 cultivators licensed to grow marijuana in the state, raised $9.45 million from angel investors as it ramps up cultivation.

Northern Virginia's start-up scene was led by a $30 million raise for the cybersecurity analytics firm ThreatQuotient, which got funding from software giant Cisco and Maryland-based venture fund New Enterprise Associates.

There was also a $20 million funding round for Arlington-based Axios, the new media company started by Politico founders Mike Allen and Jim VandeHei.

But the influx of money in the region is being captured primarily by a few late-stage start-ups, meaning it's still very difficult for budding entrepreneurs to find backing. In terms of the total amount of start-up funding for the region, the most recent quarter was the best in recent memory; in terms of the number of companies getting funded, it was one of the worst.

Dan Woolley, who was a founding partner at the Mach37 cybersecurity incubator in Herndon, said he noticed investors starting to move upstream in 2011, a trend that he expects to continue. "I think it's going to be much harder for very early-stage companies to find money because investors are going to be looking for a different multiple," Woolley said.

Jim Hunt, a technology investor who teaches an investment course at Georgetown University's business school, said investors are flocking to more mature start-ups because doing due diligence on a lot of smaller companies can be overly time-consuming.

Betting on an untested company isn't always seen as worth the risk, he said.

Venture capitalists "have figured out that there's only so much they can manage . . . it's hard to do a ton of smaller deals," Hunt said.

Jonathan Aberman, a Virginia-based technology investor, said the tendency toward megadeals could be a problem for the region if early- and mid-stage companies don't get the fuel they need to grow.

"Fundamentally, we're just not a very compelling venture capital market right now," Aberman said. "Our business community is likely going to have to be more actively involved in mentoring companies in order to fill that void."

Others say it might not be such a bad thing that investors are favoring more established start-ups, even if it means younger entrepreneurs have a harder time getting help.

"Our companies are growing up," said Woolley. "I think that's a really good thing for the region."