A year or two ago, the venture capital (VC) world was simply not the place to be.
While the economy was just starting to retrench and refuel after depths of The Great Recession, funds were not active and the early stage angel market had just about dried up.
But today, despite some talk of a double-dip downturn, the VC market is on an uptick, with more selective funds continuing to more intently browse the entrepreneurial landscape for better deals than they had been in recent times.
And there is also, generally speaking, more activity among the angel investors, who provide that crucial link for startups looking to enter the market and hoping to make a rapid ascent toward another round of venture cap acquisition.
What caused the souring of the VC market was, in this case, obvious.
“I think the major economic events of the past several years, and the ensuing credit crisis, scared many investors who are now looking for more secure [deals],” said Frank Dickson, program manager and principal with the Maryland Department of Business & Economic Development’s (DBED) Venture Capital Fund.
But that’s not all. “Many of the larger investors, like pension funds, had to reallocate the amount of their funds because their portfolios decreased significantly in value,” Dickson said, “so they invested in bonds, treasuries, debt, equity (such as stocks) and private equity (which includes VC).
“And the portfolio values dropping,” he said, “led to them reducing the amount of money they had invested in VC.”
But Dickson is more upbeat today.
“Overall, VC markets are coming back,” he said. For instance, he noted that DBED just invested $100,000 in an Internet company based in Maryland, “but the CEO called me back and said that they were oversubscribed. He asked me if we could reduce our investment by $50,000. They raised more money than he thought he was going to.”
So overall, while the economy isn’t as robust as it was pre-recession, “It’s much better than it was two years ago,” Dickson said.
That prevailing thought and the cybersecurity boom inspired the founding of Maryland Cyber Investment Partners (MCIP) to offer what Managing Partner Art Jacoby is calling “a hybrid approach,” which includes an angel-sized $25 million fund that he and his partners, Larry Letow of Covergence Technology Consulting and Joe Tedesco, founder of Potomac Investment Partners, are combining with consulting services.
“I’ve had cyber clients for several years and it was obvious, due to the assets that exist in Maryland, that this would be a strong, growing market for at least the next five to 10 years,” said Jacoby, noting that Forrester Research estimates that information technology is a $35 billion market today.
“Seeing that market, we [recently] launched MCIP, not as an angel fund, but as a hybrid of an advisory firm and an investment bank,” with $25 million of committed capital, he said, adding, “I think this is the biggest economic opportunity that this state has seen, or will see, for decades.”
For perspective, Jacoby noted that the state just launched a program called Invest Maryland that offers $75 million.
Even though MCIP isn’t being billed as a straight VC fund, Dickson thinks MCIP, “with its small fund, is helping to address the lack of VC from traditional firms,” he said.
“They’re as small or smaller than Steve Walker’s [of Walker Ventures, in Glenwood] fund. Steve operates as an angel, and Larry and Art are in that boat,” he said. “They don’t see a big risk if they go after the cyber arena, because there’s more than ample opportunity in that market.”
Roger London, chairman of the Ellicott City-based American Security Challenge, and a technology scout in the defense and intelligence community, analyzed the bigger picture of today’s VC market.
“In recent years — basically during the first decade of the new century — three out of four VC funds lost money, with about a -6% return,” London said, “which means that many people who were in the business were overaggressive.”
As a result, VCs that used to raise about $30 billion in funds per year are now down to $12 to $15 billion per year. “That’s starting to rise, but it means that there are fewer VCs and less money,” he said. “VCs that survive will be the blue chippers, like New Enterprise Associates, Grotech Ventures and Valhalla Partners.”
What that means, he said, is that the gap for early stage capital has widened, thus creating opportunities for early stage investors. “In the mid-Atlantic region, Blue Heron and Blu Ventures have been very active and have successfully filled that void.”
The even better news is that “there is much business to be had, and there will be some people who step, up and are very active,” London said. “There are also large organizations that support the defense and intelligence community that are assembling in-house VC groups. They see the opportunity created by the lack of early stage funders, and they can capitalize on it.”
Other see the rebound occurring. “I think there is more interest in the VC space, certainly from angels. Most importantly, you are seeing a stronger relationship between angels and VCs,” said Mark Heeson, president of the Arlington-based National Venture Capital Association.
“Angels see they need to basically shape the deal in a way that makes it attractive to the VCs down the road to take a company to the next level,” said Heeson, “and VCs see that the angels need to make money on the deals, too.”
While the lack of funding is viewed in some quarters as a recent trend, Julia Spicer, executive director of the Mid-Atlantic Venture Association, didn’t second that observation.
“In my 12 years in this industry, I don’t think there’s ever been a year where people said that there was enough angel money,” said Spicer.
But most importantly, despite lingering concerns about high employment, health care debate and access to the credit market, Spicer feels “like we have a bubbling up of industry sectors.
“We’re moving in the right direction and we have extraordinary, innovative entrepreneurs in our region, and investors are coming out of their shells and building companies. And that’s where new jobs are created. That will be a big boost to employment in the U.S. It’s an exciting time.
“And,” Spicer added, “good companies always get funded.”
Heeson commented on the heightened sense of optimism in the VC world today. “The entrepreneurs have had a tough two years or so, but they continued to work,” said Heeson, “and I hope they will reap their rewards.
“What’s left standing today are tough, but realistic, entrepreneurs who realize that they won’t become millionaires overnight,” he said, “and that it’s hard work and that failure is more likely sometimes than not.”
London knows that animal well and feels that a lower key approach to the big picture is a good idea.
“What [entrepreneurs] should do,” said London, “is spend their resources and attention on acquiring clients and revenue, which precludes the need for investment capital,” he said.
“Unfortunately, many companies get enamored with searching for investment capital, which diverts their attention and resources from generating and servicing customers. People get distracted by the shiny object,” London said. “They need to forget the romantic notions of obtaining investment capital and start sticking to the basics.”