Md. venture-capital firms invest 90% out of state


Maryland venture-capital firms invest 90 percent of their capital out of state, making it harder for local start-up companies to gain financing, especially in the biotechnology industry, says a new University of Baltimore study.

"I was a little surprised by how much money flows out of this region," Zoltan Acs, a research fellow at the university's Center for Business and Economic Studies and the lead author of the study, said this week. "Ninety percent is a lot. And I was a little surprised that there appears to be this underfunding of biotechnology. It's talked up so much, you think money must be flowing in here like crazy."

For example, only 12 of the 175 investments made by New Enterprise Associates of Baltimore, the state's biggest venture-capital firm, are investments in Maryland companies. T. Rowe Price Threshold Funds are invested in 47 companies, only one based in Maryland, said the study, which was released earlier this month.

Mr. Acs said that venture capital is critical to young biotech businesses. "Venture capital is absolutely crucial. Banks won't lend to something that's unproven, and these companies are in no position to go to Wall Street because there are no profits yet."

Mr. Acs said the study doesn't contend that Maryland venture capitalists are actively disdaining hometown companies. Instead, he said, the reasons so much venture capital flows out of state have a lot to do with the internal workings and investment philosophy of individual venture firms.

"The venture-capital firms are specialized in two ways," he said. "One, they invest much more in later-stage financing [of more established small companies] than they do in start-ups. Second, some specialize in industries that aren't found here."

Nonetheless, Mr. Acs said, in states such as California and Massachusetts, where biotechnology commercialization has moved faster than in Maryland, an important reason biotechnology entrepreneurs succeeded was that those states have established informal networks that connect venture capitalists' money and scientific researchers' ideas.

"Every indication is that biotech is going to become a fairly large industry, and Maryland is well-positioned to take advantage of -- that. But clearly one of the disadvantages is the lack of entrepreneurialism and venture capital in this area. We're playing catch-up," Mr. Acs explained.

Recent studies by the Greater Baltimore Committee have noted that Maryland ranks third in the nation in the number of biotechnology companies but that the state's biotech industry is composed of younger, smaller companies than the nationwide industry average. In both revenues and number of employees in biotechnology, Maryland ranks lower than third.

"Boston and California have a whole entrepreneurial culture dedicated to creating start-ups," Mr. Acs said. "That's what we're trying to create in Maryland. . . . That means our biotech companies lag behind."

Venture capitalists took some issue with the study's findings.

"The type of investor base we have doesn't want us dealing with start-up risk," said Douglas Hickman, managing director of the T. Rowe Price Threshold Funds, which make later-stage venture investments. "We can't break that promise to invest in Maryland companies. . . . We're bound by our charter."

Stuart Frankel, a managing director at Grotech Partners L.P. in Timonium, said venture-capital funds allocated by Maryland firms are usually raised from out-of-state institutional investors with no particular allegiance to Maryland.

In Grotech's case, it raised $50 million from out-of-state institutional investors last year. Of the $10 million it has invested from that pool in companies, $6 million has been invested in Maryland businesses.

"We brought $50 million into the state, and more than half has been invested in the state so far," he said.

Mr. Frankel added that most venture-capital firms see themselves as national or even international players and seek investments around the nation.

Venture capital Backing


Venture.. .. .. .. .. .. Companies.. .. .. Maryland

capital.. .. .. .. .. .. . invested.. .. ..companies

firm.. .. .. .. .. .. .. .. in.. .. .. . invested in

Arete Ventures Inc.. .. .. ..34 .. .. .. .. .. ..0

Broventure Capital Mgmt... . 15.. .. .. .. .. .. 6

Catalyst Ventures.. .. .. .. 8.. .. .. .. .. .. 4

Emerging Growth Partners.. . 50.. .. .. .. .. .. 1

Greater Washington Invest... 36.. .. .. .. .. .. 3

Grotech Partners L.P... .. . 22.. .. .. .. .. .. 7

New Enterprise Assoc... .. 175.. .. .. .. .. ..12

T. Rowe Price Threshold.. .. 47 .. .. .. .. .. ..1

Venture First Assoc... .. .. 30.. .. .. .. .. .. 1

Washington Resources Group.. 10.. .. .. .. .. .. 0

Woodbrook Capital Inc... .. . 2.. .. .. .. .. .. 2

Zero Stage Capital.. .. .. .. 4.. .. .. .. .. .. 3

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