January 19, 2011
Back in the wild and wooly days of the mid-1990s Internet boom, most DC business pundits were projecting that the capital region was going to be the “Next Silicon Valley.” It was heady times as local tech-star AOL, acquired Silicon Valley Internet pioneer and darling, Netscape. All of a sudden DC firms like UUNET, and PSINet gained national attention and became hot properties comparable to today’s Facebook, Groupon and Living Social. In the late 1990s, as a result of all the heat and hype, VCs began springing up in DC like mushrooms in a dark, dank heap of dung.
Today, two boom-to-bust technology bubbles later, only a very few of those mushrooms survive. The largest and oldest area VC, New Enterprise Associates (NEA), with offices in DC and on Silicon Valley’s Sand Hill Road, continues to thrive since its founding in 1974. Regional powerhouses like Grotech (founded in 1984) and Edison Ventures (founded 1986) are still actively investing. Internet-boom-birthed Novak Biddle (founded in 1997) has managed to build a strong foundation and buck the trend.
Yet many of those internet frenzy spawned funds have ceased operations in the last 10 years. Once high-flying FBR Ventures, the venture arm of the of local investment bank Friedman Billings and Ramsey, closed their doors in the last 10 years. Former FBR Venture partners, Hooks Johnson and Gene Riechers, left FBR and teamed up with former NEA partner Art Marks to form Valhalla Capital Group, one of the few new firms to survive a local DC venture fund melt-down. The list of local venture firms that have either closed or ceased making venture investments include:
Then there are the examples of once active funds who have gone quiet. Core Capital reinvested in an existing portfolio company in 2010 and hasn’t announced a new investment since 2008. Updata announced just one new $10 million investment in January 2009. Carlyle Ventures, Columbia Capital (a firm co-founded by VA Senator Mark Warner) and Telecommunications Development Fund all haven’t announced new investments since 2008.
According to the Dow Jones recent report on venture capital fund raising, this is not a malady peculiar to DC. Last year was the worst year since 2003 for venture funds seeking investors. According to Dow Jones, just 119 funds raised $11.6 billion which was down from 133 funds and $14.5 billion in the prior year. The same report shows a nearly a 50% reduction in VCs raising capital since 2007.
Much like Mutual or Hedge Funds, VC Funds raise capital from investors in order to reinvest in entrepreneurial startups. Like the entrepreneurs who come begging to VCs, VCs must periodically knock on doors and go begging for capital. Venture capitalists raise money from institutions like banks, insurance companies, pension funds, endowments and wealthy individuals known as Limited Partners or LPs.
The drop in available capital can be attributed to several factors relating to their Limited Partners, including:
- The mortgage derivative meltdown, stock market crash and real estate investment crash resulted in a reduced capital base available for new investments.
- Less liquidity in the market. With fewer companies going public or being acquired, there have been fewer liquidity events and little capital gains or return on capital to reinvest.
- Poor performance in venture investments in recent years has made investors squeamish about doubling-up and investing good money after bad.
With less money for LPs to invest, it stands to reason that only the strongest venture funds are attracting new capital and surviving. The strongest funds are in Silicon Valley and Massachusetts. The secondary markets, like DC, will suffer while the money is tight.
That would explain why 39% of all investments made in DC companies in Q3 of 2010 came from Silicon Valley compared to only 25% from DC.
The 2010 capital market results weren’t all doom and gloom and may portend an eventual silver lining. Last year the stock market was up. It was a banner year for M&A and IPO activity. According to the National Venture Capital Association, 2010 was the best year since 2007 for IPOs resulting in 72 companies going public at a total value of over $7 billion. M&A had the best year since 2003 with 420 deals versus 273 in 2009. A rising stock market and increased IPOs and M&A produce positive returns for private equity investors like Venture Funds and create liquidity for their LPs. Hopefully they will reinvest their new found earnings in Venture Funds and the Venture Capital industry nationally, and in DC, will rebound.
Guest author Glen Hellman is an angel investor, serial entrepreneur, and works for venture capitalists as a turn-around specialist. He muses on his blog and works with entrepreneurs to help them figure out what to do and get them to do it. He’s a principal at Driven Forward, member of the board at The University of Maryland’s Dingman Center for Entrepreneurship and is a mentor at the Founder Institute, which is a good excuse but not the reason he is such a horrible hockey player.
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