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February 29, 2000

Shaking The Money Tree

Region Is Awash In VC Money, And The Tides Just Starting To Come In

Where Are The Players Investing?

Columbia Capital. Over the past decade, Columbia Capital has invested over $100 million in communications and information technology companies. Examples of past investments range from business plans originated by Columbia Capital's professionals to niche consolidation companies in which the firm has invested up to $27 million in a single opportunity. Columbia Capital has invested in firms such as Nextel, Spaceworks and Riverbed Technologies.

Lazard Technology Partners looks to invest in technology companies which can be leaders in their segments. Investment areas include Internet/intranet, software development, data communications, telephony and technology services. The fund invests primarily in seed and first-round financings in initial amounts from $250K to $5 million. Portfolio companies include telezoo.com and Cyveillance.

Novak Biddle Venture Partners provides equity financing and assistance to young IT companies with investments that typically range from $100K to $3 million. The fund invests in companies at their very early stages through first round and seeks situations where the combination of ideas, dollars, experience and relationships can create long-term, sustainable value, looking especially at key features such as a unique or proprietary advantage, strong management, creativity, expanding defensible markets, scalability, liquidity and fun. Portfolio companies include Para-Protect Services and Blackboard.

 

(Reston, VA -- February 29, 2000) 
Although Bill Bishop has been with PriceWaterhouseCoopers (PwC) since 1988, he has been based in the DC area as a Principal in its Technology, Entertainment and Media Practice for only six months. His impression of the region? "The only thing I can say is, 'Wow, what a place to be!'"

He spoke this morning at "Shaking The Money Tree," an event sponsored by PwC and the Morino Institute's netpreneur.org, on the regional results of PwC's latest MoneyTree™ survey of VC investments, featuring commentary by three leading venture capitalists: Kevin Burns of Lazard Technology Partners, Karl Khoury of Columbia Capital and Roger Novak of Novak Biddle Venture Partners.

Fran Witzel, Vice President of Investor Services at netpreneur.org, introduced the event, noting that "Venture capitalists are now the power brokers, banks, management providers, gurus and even mothers who hold the hand of the newbie companies and take them past the training wheel stage into rocket racers." Will every business get venture capital? "Only a handful in a hundred actually will," Witzel said, and that just may be the best indication of exactly how fertile Internet entrepreneurship is today.

Despite the odds, according to PwC's Carl Grant who presented the MoneyTree results, entrepreneurs collected some $14.7 billion from VCs in Q4 1999 nationwide, bringing the year's total to $35.6 billion—about $160 million dollars a day. Most of the money, 90%, went to technology companies, and over half to Internet companies. Rather than bombard the audience with statistics, however, panelists focused on analyzing a few key numbers, exploring how to grow the pie, not the number of slices.

When you look at Greater Washington's place in the regional breakdowns—189 deals worth $1.6 billion—it takes sixth place behind Silicon Valley, New England, New York City Metro, the Southeast and LA/Orange County. "Have we over-hyped the region?" asked Grant pointedly. Not at all, said the panelists, who agreed that the numbers reflect how the region is just getting started. Funds and new companies have just begun cropping up, and much of the money going into VC funds has been collected by the biggest players, most of whom are in Silicon Valley. Burns gave Greater Washington an edge in deal quality over higher profile areas, and Novak stressed the importance of DC as the center of global telecom, as well as the fact that many government technologies are hitting the mainstream to fill holes in the Net's infrastructure.

"I am really bullish on this area," said Novak. "I think it's going to be just enormous over the next five to 10 years."

Where areas like Silicon Valley and Boston do have an edge, according to Khoury, is in the number of experienced managers, but that's changing, too. It also reinforces a point heard often from investors, that a Class A management team can be one of the biggest factors in closing a deal.

VC investments in Greater Washington companies last year averaged $11.03 million each, with 48.3% of them involving first round funding at an average value of $10.7 million. That's another number that skews the regional rankings, because service providers usually garner much larger investments. This region's strengths are in access, infrastructure, tools and applications. Nationally, Internet deals broke almost evenly among six sectors: Access/Infrastructure (17%), Tools & Applications (15%), B2B E-commerce Sites (13%), B2C E-commerce Sites (22%), Content Sites (17%) and Services (16%)— that's a total of 32% for infrastructure and tools. Around the Potomac, 70% of deals were in those two categories, along with respectable representation in E-commerce Sites (11% of regional deals went to B2C sites, 9% to B2B).

That's good because it's what many VCs are looking for especially. Novak wants, "defensible, proprietary technology." Both he and Khoury prefer those spaces, and B2B E-commerce, over content and consumer operations. Those are more Silicon Valley and New York type deals, according to Khoury, who said that at Columbia Capital they ask, "Are we putting money into branding, or are we putting money into a management team or underlying technology?"

What are the hottest areas for the three investors? All six eyes light up with the subject of wireless applications, plus online learning, knowledge management and security, especially authentication. And B2B E-commerce still has a long way to run, according to Novak.

According to PwC's Bishop, "It's a great time to be an entrepreneur because there is more money available than ever before." How do you get your share? Introductions count. Of Lazard's 19 deals, 18 were referred by someone they knew. Burns said that about 80% of their portfolio comes from a limited partner network made up of technology experts, and Khoury said that of Columbia Capital's 29 deals, four were created from in-house ideas; about a third were referred by service providers (such as lawyers or accounting firms); another third from limited partners and the rest involve executives they had worked with before.

There's a reason, of course. VCs have to do a lot less work with vetted deals. While your chances are better with an introduction, all of the panelists said they look at almost everything that comes in over the transom and try to get back with meaningful input. You can improve your chances by doing your homework—find out what market and stages the fund is interested in and only apply if you meet the criteria. Also, send business plans to a personal email address rather than info@ addresses. PwC's Grant gave an even better clue. According to tracking they have begun with the Mid-Atlantic Venture Association, 20% of all deals in the Greater Washington region in Q4 1999 involved companies that had presented at the Mid-Atlantic Venture Fair. Said Grant, "We expect that to go up next quarter and the quarter after that."

If the fact that Internet companies are hot is the world's worst kept secret, the most asked question always follows: When will the bubble burst? The panel had more than encouragement for netpreneurs on that score—it's just getting started. Burns said, "The bubble bursting is just kind of laughable to me." The reason is that the Internet is fundamentally affecting all areas of business and society. For Novak, it's different from other crazes like biotech, because biotech was really a technology, not a true paradigm shift. And while investors are certainly becoming more discerning when looking for returns, Khoury sees still another wave of ideas coming from people who cut their teeth at first-wave companies like AOL and UUNET.

A technology entrepreneur himself who founded Intersolv before moving into the venture capital arena, Burns' optimism comes from contrasting today's climate to the stable technologies of the 70s and 80s. Stability gives the advantage to large corporations, but with paradigm shifts, he said that leverage flows to the quicker entrepreneur. "My reading of the tea leaves is that technology, wireless communication and infrastructure are changing so rapidly, that we are going to have a long run where entrepreneurial innovators with the right capital, the right management and the right passion will be able to turn the tables on large big branded companies throughout the world."

Click here for an edited transcript of the event 

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