Young firms venture to Baltimore for funds Entrepreneurs seek investors at fair

Savvy buyers looking for bargains wound their way through a labyrinthine marketplace of truly exotic wares yesterday, chatting amiably with dozens of merchants who sniffed keenly for the hint of a possible sale.

The Mid-Atlantic Venture Fair is in town, and it has transformed the fifth floor of the Stouffer Harborplace Hotel into a cross between a Wall Street boardroom and a Middle Eastern bazaar. Sixty young companies from the mid-Atlantic region have come to town, each responsible for giving an eight-minute presentation during the two-day conference, which is a production of the Baltimore, Washington and Philadelphia venture associations.


About 240 dark-suited venture capitalists, lawyers, accountants and bankers came to listen to these pitches, exchange business cards and try to find the next Microsoft Corp. -- before anyone else does.

One of the merchants was James K. Don, president and chief executive of Annapolis-based American Day Treatment Centers Inc. Like the other business people at the Stouffer hotel, Mr. Don was in search of that most-entrepreneurial form of American financing: venture capital.


Mr. Don, a veteran of the mental health hospital industry, does not lay claim to the growth potential of a Microsoft, but he thinks he has something special. American Day runs a growing chain of mental health "partial hospitals," which provide a variety of treatments in a bedless, 9-to-5 setting (or 8-to-4, depending on the program).

In three years, the company has grown from a start-up to a chain with nine centers in five states, 120 employees and almost $7 million in annual revenues this year, up from $4 million last year. And October will represent the company's first overall profitable month, Mr. Don was proud to tell his audience yesterday.

So far, American Day has raised $12 million in various rounds of venture financing, including several investments from Baltimore-based New Enterprise Associates, Catalyst Ventures L.P., and ABS Ventures L.P., an affiliate of Alex. Brown Inc. Mr. Don is looking for another $5 million to $8 million, as well as a public stock offering in 1995 or 1996, so he can meet his goal of 73 facilities by 1998.

"I think in the services business, timing is everything," he said in concluding his brief talk, "and we think the time is now . . . for American Day Treatment Centers."

The time certainly is now for venture capital. After suffering a period of stagnation in the late 1980s, the industry has shown explosive growth in the past few years, particularly in the mid-Atlantic region.

In the past 15 years, about 50 venture capital firms have grown up between Virginia and southern New Jersey, raising roughly $3 billion in financing, according to Charles W. Newhall III, a general partner of New Enterprise Associates, and one of the organizers of this year's fair. That puts the region fourth behind California -- with $10.7 billion raised -- New York and Massachusetts.

Of the $3 billion raised here, about $2.3 billion was invested in Baltimore-Washington area companies that now have $2 billion in annual revenues and about 20,000 employees, according to Mr. Newhall. While overall employment growth has been negative or flat in Maryland, these companies are expanding by 35 percent a year.

One reason for the growth of venture financing is that the area's venture firms are finally starting to join together in syndications, as California's Silicon Valley firms did almost from the start, Mr. Newhall said.


Another is that venture capital has partly filled a vacuum created by the banks.

"I think the role of venture capital in financing the development of companies in the last three years since banks have gotten in trouble has gained in importance," said Frank A. Adams, president and chief executive of Grotech Capital Group Inc. in Timonium, and one of the chairmen of this year's venture fair.

Interest in venture financing is likely to pick up further when President Clinton's tax plan goes into effect next year. It would lower the capital gains tax rate on long-term investments in start-up companies to 14 percent from 28 percent. That definition fits most venture investments.

The Baltimore-Washington area is poised for even more growth, because the region is flush with companies in three of the fastest growing industries: computers and telecommunications; biotechnology; and health care services.

"Our business is to finance change," Mr. Newhall said. "So whatever advances have the potential to change the world as it is, we swim in it."