When four executives from Human Genome Sciences came up with a plan to buy a new division they'd created within the Rockville biotech and spin it out on its own, there was one, deal-breaking condition put on the table.
They had to find their own financing within six months, or the project, a company called CoGenesys Inc., was dead.
They found it and the $55 million deal helped fuel a tripling of venture-capital investment in Maryland in the second quarter.
The CoGenesys investment was the seventh highest deal in the nation in the second quarter, according to data being released today in the MoneyTree Report, which chronicles venture capital spending in the United States.
The report, by the National Venture Capital Association, PricewaterhouseCoopers and Thomson Venture Economics, showed a more modest investment surge nationwide and a marked shift to early-stage companies such as CoGenesys.
"It was a really awesome quarter in Maryland," said William S. Corey Jr., managing partner of PricewaterhouseCoopers' Baltimore office.
Of the top 10 deals in the country, two were in the state. CoGenesys was the No. 7 deal, but the No. 1 investment went to CURRENT Communications Group LLC, a Germantown telecommunications company that raked in $130 million.
"That's a big number" from "a high profile group," Corey said, referring to financial backers that included EarthLink Nework Inc. and GE Equity.
CURRENT plans to use the money to speed up the deployment of its "smart grid" technology, which delivers broadband over power lines. This was the company's fourth round of financing.
Nationwide, $6.35 billion was invested in April through June in 856 deals, up from the $6.3 billion invested in 804 deals in the second quarter of 2005. In Maryland, 33 companies took in $334 million, triple the amount in the quarter last year.
Venture capitalists invested slightly more money in more deals in the second quarter than they have in that period since early 2002, with much of the cash going to very young companies at the expense of more mature ones.
"We've been watching for a shift there," said John S. Taylor, vice president of research at the National Venture Capital Association, of Arlington, Va.
"Venture capitalists are turning their attention back to the next crop of companies," said Taylor, in a media conference call to discuss the MoneyTree Report. "This is the first time in four years we've seen [that]."
Early-stage investors and the millions they bring are key for many start-ups, providing resources to help them survive before they can bring in significant revenue. But the dot-com bust in 2000-2001 dampened venture investments in the sector and especially quashed deals for the newest of new businesses.
Sign of rebound
But that's changing according to today's report, which financial experts took as a sign that the venture capital industry was rebounding.
Despite the huge figure invested in CURRENT, telecom investment overall was down slightly for the second quarter, dropping 11.5 percent to $632 million from $714 million a year earlier. Software investments led the quarter, though they, too, were down, to $1.26 billion from $1.32 billion in the second quarter last year.
Financing for the other key industries identified in the report all rose, however. Semiconductors were up 29 percent over last year to $555 million, medical devices were up 14 percent to $549 million, and industrial/energy investments more than doubled to $417 million.
Biotechnology (big in Maryland, where more than 350 such companies reside) was up as well, to $1.2 billion from $1.05 billion in the second quarter last year.
"People really believe the biotech industry is here to stay," said Dr. Gilbert H. Kliman, a general partner with venture firm InterWest Partners of California. "It's growing bigger, and it's a really good investment area."
Those at CoGenesys are counting on that sentiment.
Human Genome Sciences - HGS for short - had lost the edge it once had in developing new drug candidates, said Craig A. Rosen, who was one of its founders and is a founder of CoGenesys. He wanted to get it back, if not for HGS, then at least for himself.
"This is a chance to get back to what I really enjoyed doing," he said.
Though the company technically is in its earliest days, having officially cut the umbilical cord from HGS last month, it's got all the employees it wants (70), labs and manufacturing facilities inherited from HGS (48,000 square feet) and a drug going into clinical testing in August - something that takes a typical biotech years to achieve.
But CoGenesys isn't exactly typical, said chief executive and co-founder Steven C. Mayer.
"We don't imagine ourselves putting a drug on the pharmacy shelf," Mayer said. Instead, the company plans to operate in a middle zone, taking proven drugs or drug candidates and improving them, then putting them through early to mid-stage clinical testing before finding partners to take them further.
Mayer, Chief Scientific Officer Rosen, fellow founders Mark A. Rampy, the company's chief business officer, and Chief Technology Officer Indra Sanyal are not quite sure what they would have done if HGS had turned down their offer or the money hadn't come.
"The important thing," Mayer said, "is that it did happen."