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In Maryland's 'innovation economy,' a contrarian view of acquisitions

Whenever Baltimore-area companies sell themselves to out-of-state firms, economists and local leaders alike bemoan the loss. Another headquarters gone. Fewer corporate decision-makers here. Possible job cuts.

But Silicon Valley's deals for two Columbia firms — the planned Micros Systems acquisition, announced last week, and Sourcefire last year — strike local entrepreneurs in an entirely different way.

They want more California tech giants doing business here, more billion-dollar-plus acquisitions. They're crossing their fingers that Micros execs take the money they get from the sale to Oracle and invest it locally — either by starting new companies or turning venture capitalist.

"Maryland should hope to be an acquisition target," said Mike Brenner, co-founder and chief executive of Betamore, a business incubator that opened in Baltimore last year. "To see recent acquisitions of Micros and Sourcefire in the billions of dollars shows that we are building incredibly valuable and long-lasting companies."

Little surprise that startups — and the people who help them — come at the acquisition debate from that angle. Plenty of entrepreneurs would love to be bought out — sometimes so they can start fresh with another idea.

It's this high-reward, high-risk slice of the economy that state officials are pushing hard to expand.

In the last two years, Maryland raised $84 million for early-stage venture funding by auctioning tax credits, held two national contests for startups, launched a partnership to get more university research commercialized and began offering tax credits for cybersecurity firms.

Gov. Martin O'Malley calls it the "innovation economy," saying in a speech last fall that such innovations "drive the new solutions that create the new jobs and opportunities."

The U.S. Chamber of Commerce Foundation ranked Maryland first in the nation for the past three years on innovation and entrepreneurship, helped by its high concentration of academic research and development and jobs in science, technology, engineering and math fields.

That speaks more to the state's potential than results. The entrepreneurship-focused Kauffman Foundation, measuring the rate of adults forming businesses, found that entrepreneurial activity in Maryland was about average — 26th in the country. (That's all businesses, not just fast-growth startups.)

But if a single measure captures both Maryland's strengths and how much room there is for improvement, it's venture capital.

Businesses in the state landed $645 million in VC funding last year, up 50 percent from the year before, according to the MoneyTree report produced by PricewaterhouseCoopers and the National Venture Capital Association with Thomson Reuters data.

That's more than all but five other states in the country.

But Maryland is far removed from California (nearly $15 billion), Massachusetts ($3 billion) and New York ($2.8 billion), the top three.

It would be no easy feat to rival California for startups, let alone get to that state's level of big tech firms. That's part of the reason California firms were the acquirers in the Sourcefire and Micros deals, not the other way around.

Richard Clinch, a locally based research economist at Battelle Memorial Institute, said the state isn't reaching its full potential, given its academic R&D and other assets. He points to taxes and other policies that hand advantages to competing states in the battle for headquarters firms.

"Nobody says we're a slouch when it comes to generating companies," he said. But "most of these companies end up moving or getting acquired before they become Oracle."

Then there's the vicious cycle issue: It's harder to raise money outside of Silicon Valley, Boston and New York, so startups cluster there. Maxwell Wessel, a researcher for the Forum for Growth and Innovation, put it bluntly in a blog post for the Harvard Business Review last fall: If your company needs VC funding and you don't base it in one of those three hubs, "you're stacking the deck against yourself."

James C. Foster, CEO of ZeroFOX, a cybersecurity firm that launched in Baltimore last year, thinks Maryland has one of the best state-funded venture funds in the country. But it can't provide enough money to kickstart a company by itself, he said — that's where private funders come in. And those options are limited, compared with Silicon Valley.

"I could probably visit most of the regional players and VCs in two days — three days at most," Foster said. "If I were in California, I wouldn't even get done one complex on Sand Hill Road in two days."

He's pointing out a challenge for entrepreneurs, not griping. He's lived in California, Boston and New York, and he chose this area for a reason — "Maryland-D.C. is the mecca of security."

So far, the bet's paid off. ZeroFOX, which focuses on cybersecurity threats from social media, has raised $13 million from both local and out-of-state investors. Among them is Sourcefire's former chief financial officer. That's allowed the company to expand from its original two people to nearly 50.

The company is based in one of the most entrepreneur-intensive buildings in the city. RedOwl Analytics, a data analytics firm, is one floor down in the South Baltimore complex; Betamore — with 20 startups on site full time and more entrepreneurs coming and going — is one floor up.

"Baltimore isn't necessarily the first place people would think of for an innovative tech company, but we're … proud to be part of the story to help people start thinking that way," said Renny McPherson, a co-founder of RedOwl, which just closed a $4.6 million round of fundraising. "We're really happy about the government effort to spur the innovation economy. We're just trying to do our part."

RedOwl's software uses "big data" — including email and texts — to help firms find workers committing fraud or exonerate the wrongfully accused.

One of its Betamore neighbors is Citelighter, an "edtech" — educational technology — firm with an online writing platform for students that helps teachers zero in on areas that need work. Citelighter's founders moved the company from New York last year after one of their investors, former T. Rowe Price executive John Cammack, convinced them that Baltimore was a great place for edtech.

There's a definite cluster here, partly fueled by Teach For America alumni, but not a massive one. And there's an upside to that.

"New York City, you're one of quite literally 10,000 startups," said Saad Alam, CEO of the 22-employee firm. "It's very difficult to get into the school system and run the trials you need to in order to make sure your product is working. In Baltimore … people are so darn willing and excited to help us move things forward."

Betamore's Brenner got involved in startup development after moving to Baltimore seven years ago and running his own Web development company. He said he's seen improvement in funding opportunities since then, as "angel" investors focusing on early-stage companies organized in Baltimore and have held seminars to help more people become funders.

John Backus, managing partner at New Atlantic Ventures, a Reston, Va., firm that predominantly invests in the I-95 corridor, points out that Maryland — and the entire region that includes D.C. and Virginia — has been moving up the national venture capital rankings.

Pair that with local strengths in health care, cybersecurity and edtech, and "I just feel really good about the hand that we've got," he said.

Brenner's top concern isn't money flow, in fact — it's workforce. He wants the startups forming and moving here to have the talent pool for growth.

"There's a big need for web developers, programmers, data scientists," he said.

Rob Rosenbaum is executive director of Columbia-based TEDCO, the quasi-government agency that invests in early-stage tech firms and helps commercialize academic research, so he is concerned about capital. TEDCO is launching privately capitalized funds to fill some of the gaps.

This matters for the whole state, not just entrepreneurs, he said.

"Almost all net new jobs come from young, growing businesses," Rosenbaum said. "Whereas mature businesses, it tends to just be a churn."

Elana Fine, managing director of the University of Maryland's Dingman Center for Entrepreneurship, said she's seen progress in the state in recent years. More incubators, more funding, more startup activity in Baltimore.

The Johns Hopkins University wants to play a bigger role in that. Officials at the Baltimore institution are working to change the dynamic that has long put the university at the top of the heap for federal research funding, but not at all competitive when it comes to licensing its discoveries.

Its licensing revenue, though on the rise in recent years, is a tenth of what Columbia University in New York earns.

A faculty committee charged with accelerating Hopkins' entrepreneurship efforts recommended in April that the university create office and lab space for startups near the Johns Hopkins Hospital, launch venture funds and build up networks of mentors to help newbies make the leap. The startup space is now in the works, said Christy Wyskiel, senior advisor to the president at Johns Hopkins University.

"Whether or not we will financially recognize some major [winner], time will tell," said Wyskiel, a former Wall Street investor. "That's usually a drug, and drugs take time to get through clinical trials. But as far as seeing increasing commercialization, increasing numbers of startups, I think we're seeing that now."

It's worth the state's time to cultivate larger businesses, the ones in a better position to acquire, said Karyl Leggio, dean of Loyola University Maryland's Sellinger School of Business. But she has no qualms about Maryland's focus on entrepreneurship.

That's just economic good sense, she said.

"Certain industries outlive their useful life," Leggio said. "When's the last time you bought a typewriter ribbon? … Being in an entrepreneurial space allows you to stay ahead of the curve."

jhopkins@baltsun.com

twitter.com/jsmithhopkins

Copyright © 2014, The Baltimore Sun
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