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To find investors: Go west, young startup — but come back

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.

"It's all about building your network," Troy said. "I'm of the belief that all entrepreneurs need to think globally and figure out the people they need to know in order to achieve what they hope to achieve. More often than not, those people are all around the globe. … My operating from Baltimore is not strongly relevant to how I'm pursuing our business."

It's not uncommon for entrepreneurs with a startup technology company in the Baltimore area to wonder if they should uproot themselves and head for New York City or Silicon Valley.

The advice that Brian Razzaque, chief executive of Social Toaster, a social media marketing firm, has gotten from venture capitalists in New York and California?

"Get out of Baltimore," he said.

Razzaque's company has increased revenue and attracted some major clients, including the Baltimore Ravens and the Johns Hopkins University. But he has had a hard time raising capital in the region to take his company to the next stage.

A California venture capitalist told Razzaque that he needs to move to New York, where there are more potential customers for his business. And a New York address on his business card will help him draw interest from investors in Silicon Valley, Razzaque said he was told.

"We have customers, we have revenue," said Razzaque. "We're not met with the same sort of reception we thought we should be getting" among Mid-Atlantic investors. "While we've had success with angel investors [for small amounts], getting into that million-dollar-plus range, that's been extremely challenging."

Joshua Konowe has a similar story. An East Coast investor advised Konowe, founder of Uppidy, a text-message storing and sharing service, to first head to California to raise money last year. He raised money from the Band of Angels investor group in Silicon Valley for Uppidy, which is based in Columbia and Northern Virginia.

Konowe returned home with Silicon Valley backing: "I had six figures in the bank in a week," he said. "I didn't have to wait for a check."

With Silicon Valley investors behind him, he attracted funding from two local investment groups, Fortify.vc — which had originally told him to go west — and Silber's Blu Ventures.

"As soon as I got money from out there, it changed the dynamic of everything," Konowe said.

Konowe believes the Mid-Atlantic region hasn't had enough of the major successes that produce "gazillionaires," who then reinvest in local technology companies — a cycle Silicon Valley has had for years.

East Coast investors, he also believes, are less inclined than their West Coast counterparts to accept the potential failure that comes with investing in a risky startup. "As an entrepreneur, if you screw up, you have red ink on you," Konowe said. "Here, if you blow through $50,000, it's like an unrecoverable situation."

For Lookingglass, the dual-coast investment was more a matter of "right place, right time," rather than a strategic objective, Gabbard said. He had been talking to numerous venture capitalist firms for a long time, he said.

But he started talking with a San Francisco firm, Alsop Louie Partners, last fall, about the same time it happened to secure major new commercial clients — some Wall Street financial services firms.

Suddenly, Gabbard's company, which had success in selling to the government, had closed deals with major market-leading commercial customers. Its prospects, and the software industry for cybersecurity situational awareness, looked very promising to potential investors, according to Gabbard.

After Alsop Louie agreed to invest in Lookingglass, more East Coast investors came out of the woodwork. Gabbard isn't sure if that's because others heard about the West Coast firm investing in Lookingglass, or if they just realized that the market for the company's services was getting hot.

Bethesda-based Vital Financial, a venture capital investment group, was the secondary investor in Lookingglass. Vital had been interested in investing in the company for a while, Gabbard said. When it saw that Alsop Louie was interested, it was "full bore," he said.

"Maybe there was a collective understanding that the market is ready" for his company, said Gabbard. "A lot of it is timing."

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