Derek Gabbard wasn't dreaming of California when he sought to raise investment capital for his Baltimore-based cybersecurity firm.
But the CEO of Lookingglass Cyber Solutions lucked out with a connection to venture capitalists in the state that dwarfs all others in terms of venture capital. With a San Francisco investment firm taking the lead on the investment and a Maryland firm following, Gabbard recently raised $5 million.
Such deals, where Mid-Atlantic technology companies straddle both coasts for investors, have been cropping up lately, though the dynamics underlying them vary. Leaders of local companies hunting for early-stage financing have made pilgrimages to California and either returned with a big check — or advice to move to that state or New York City if they want to build their businesses.
The conventional wisdom is that West Coast venture capitalists act quickly, pump in more money and take bigger risks. That's certainly Gabbard's first impression.
"The West Coast mind-set is a little different," Gabbard said. "Neither is better or worse, just different. I've only talked to one West Coast investor, so as far as I'm concerned, 100 percent act really fast."
Maryland entrepreneurs are looking west for startup capital if they have trouble getting traction in their own backyard. Silicon Valley last year, again, far outpaced other parts of the country in terms of venture capital invested in companies, at $11.6 billion. That amount was about $2.5 billion, or 26 percent, more than the previous year, according to figures from the National Venture Capital Association.
Meanwhile, the Baltimore-Washington-Northern Virginia area saw $941 million in venture capital — less than $20 million, or 1.8 percent, more than the year before — pumped into young companies. In Maryland, venture investments declined from $415 million in 2010 to $284 million last year.
Several entrepreneurs said the region needs to develop more sources of funding for early-stage companies. And successful entrepreneurs who had an "exit" — a big payday through a company sale or stock offering — should be looking to invest some of their earnings in other ventures in this area, to foster the sort of reinvestment cycle that's deeply rooted now in Silicon Valley, the entrepreneurs said.
"We don't have an environment that will support young startups," said Chris Jeffery, co-founder of LocalUp Solutions, a 27-person, fast-growing firm in Canton that helps give restaurants across the country an online presence. "The people who've struck it well in the tech space … we need them to reinvest back in the tech space. We haven't seen much of that."
Jeffery, who is in the midst of trying to raise more than $5 million from East Coast investors, has pitched his business to venture capitalists in Silicon Valley. But his company, while growing quickly and with millions of dollars in annual revenue already, was not focused in a high-technology area.
Jeffery said he learned that Baltimore is not much on the radar of Silicon Valley firms, which tend to cluster their East Coast investments in New York or Washington.
"We're not pitching Twitter or Facebook to them," Jeffery said. "We're pitching a pretty big opportunity, but it's not a break-through from a tech perspective. … If they're going to invest 2 [million] to 3 million and you live in Maryland, you have to show a very unique product to them."
Helping to develop early-stage companies in Maryland is a much-discussed topic in the state's business community. Gov. Martin O'Malley has tried to offer a way to jump-start early-stage investment in Maryland technology firms with his $75 million InvestMaryland plan.
That plan raises money from the sale of tax credits to state insurance companies. Revenues from such sales are pumped into new Maryland technology companies and managed by local venture capital firms. That fund is set to start operating this year.
From the perspective of Paul Silber, a founding member of Blu Venture Investors LLC, an angel investor group, the Mid-Atlantic region has too many startups chasing too little available money. He said his group, which makes investments in the range of $50,000 to $500,000, receives about 200 proposals a year to invest in companies. Of those, Blue Venture typically chooses between four and six to fund, he said.
Silber sees more money — and more competition — among venture capitalists and companies on the West Coast, which leads to higher market valuations for startups. "There are some [California angel investors] who will write a $100,000 check to every single company that comes across the transom — and that artificially inflates prices on the West Coast."
If local startups are willing to go to the West Coast, "more power to them," said Silber. "But we will not chase those deals. There are too many startups chasing too little money.
"I would say right now, it's a buyer's market," added Silber. "There really are huge numbers of startups, at all levels, with no revenue or early-stage revenue, and they're looking for money to get to the next level."
One of the startups that Silber's group invested in last year is Baltimore-based 410Labs. Dave Troy, a Baltimore entrepreneur who co-founded the company, raised $750,000 last year from East and West Coast investors.
Whereas Gabbard has a Northern Virginia contact who introduced him to a Silicon Valley investor, Troy credits the connections that he and co-founder Matthew Koll patiently cultivated for years on both coasts.