Maryland venture capital plunges in fourth quarter -- Gazette.Net


Venture capitalists tended to steer clear of bioscience companies this past year, and Maryland needs more smaller-fund firms targeting early-stage biotechs to reverse that trend, one venture capitalist says.

All told, venture capital investment in Maryland fell to its second-lowest level in the fourth quarter since the second quarter of 1995, reflecting a national drop in 2012.

Venture dollars declined nationally in 2012 for the first time in three years, according to the latest MoneyTree Report by Pricewaterhouse Coopers and the National Venture Capital Association, based on data from Thomson Reuters.

Investments in privately controlled U.S. companies totaled $26.5 billion in 2012, down from $29.5 billion in 2011.

Life sciences, which depend heavily on government support, suffered particularly this past year due to federal fiscal uncertainty, said Mark Heesen, president of the National Venture Capital Association.

“We biotech investors have to live with regulatory risk, so I’m sure that played a part in this process, especially the possible reductions in funding for the Food and Drug Administration and the National Institutes of Health,” said Kyp Sirinakis, a managing partner with Rock Springs Ventures in Bethesda and a member of the Tech Council of Maryland.

While the state has programs funding seed companies and startups, early-stage bioscience companies are getting short shrift, she said.

Investing in life sciences is riskier than other sectors because it can take a longer time for investors to see returns, Sirinakis said.

The larger problem surrounds the low level funding raised for the life sciences, particularly for early-stage companies, she said. While Maryland has plenty of deals for the taking, the big local VC firms such as New Enterprise Associates of Chevy Chase focus more on late-stage companies and larger funds. Sirinakis said having more smaller-fund feeder venture firms would help.

OpGen tops in Q4

Venture capitalists pumped $27.5 million in 11 deals with Maryland companies in the fourth quarter, down from $158.1 million and 20 deals in the third quarter, according to the MoneyTree report.

Still, the fourth-quarter numbers were up a tad from the second quarter, when eight investments totaled about $25 million. That was the smallest showing since the second quarter of 1995, when $16 million was invested in nine deals.

OpGen, a Gaithersburg company that develops optical mapping systems for the life sciences, was the top winner in the fourth quarter with $7.5 million. It was followed by Virtustream, a software company in Bethesda, with $5 million, and Baltimore biotech Gliknik, $4.9 million.

For 2012, Maryland saw $274 million and 54 deals, compared with $314 and 73 deals in 2011.

The Greater Washington, D.C., region saw $725.1 million invested in 2012, down from $987.5 million in 2011. The number of deals was relatively flat in 2012, 164 versus 163 in 2011.

“We look at this in terms of the capital flowing into the industry, which has been trending downward for some time (and that capital is also being concentrated among fewer firms),” Kate Barrett, spokeswoman for New Enterprise Associates, said in an email to The Gazette. “With fewer dollars coming into the industry, at some point, we are going to see fewer dollars coming out.”

Barrett said many investors think the “huge” inflow of capital into the venture market in the 1990s was just too much capital for the opportunity set and the overall sustainability of the asset class. They see the gradual decline among the market as a return to equilibrium, Barrett said.

Rachel King, CEO of Gaithersburg biotech GlycoMimetics, referred to New Enterprise as one of the local “bright spots” in the venture capital world because the firm is continuing to lend in the region. New Enterprise was part of a $25 million third-quarter investment in Sonatype, a software company in Silver Spring.

King pointed out many venture firms are having trouble raising investment dollars.

Others look to uncertainty in national public policy as contributing to the downward trend.

“We continue to see the impact of public policy on venture capital investment levels in very specific ways,” Heesen said in a statement. “Life sciences investment was suppressed for much of the year, particularly with first-time funding, due in part to the impact of the regulatory and reimbursement environments, while clean tech investors began moving towards more capital efficient deals less dependent on government support.”

Some ‘question marks’ erased

Capital is coming back since the Great Recession, but the appetite for risk is not coming back as fast, said Alan Klein, executive vice president for corporate development with Sequella, a biotech in Rockville. Sequella received $100,000 in the third quarter of 2012.

Federal uncertainty, including the “question marks” surrounding the battle about fiscal policy, did not help the situation nor did global fiscal uncertainty, Klein said.

“I think 2013 is trending in the right direction, but I don’t know about the risk. It’s too early to say if it will be any different,” Klein said. “The only big thing working in our favor is the national election is over, so we have consistent domestic policies.”

Sequella also raised an undisclosed amount in the fourth quarter of 2012, Klein said.

“I think for folks with good long-term exit plans, they’re getting funded. Near-term companies are having a more difficult time,” said Jack Huffard, president and co-founder of Tenable Network Security in Columbia. He said top-tier companies are continuing to get deals, but many of the others are not considered “venture-ready” in terms of risk.

Huffard said the uncertainty about tax changes also prompted entrepreneurs to hold back on changes. With Congress and the White House reaching a deal this month, more entrepreneurs might be turning to growth policies such as seeking venture funding.

Tenable received $50 million in the third quarter — the biggest deal of 2012 in Maryland. It plans to hire 200 people across the board in the next 18 months. With the information security market expanding as more people use mobile and cloud systems, Tenable needs more staff for research and marketing, Huffard said.

King said new programs in the state, such as BioHealth Innovation, which is devoted to bringing together medical resources for commercialization, might help bolster the market. She also said the recent layoffs associated with local industry giants, such as the recently acquired Human Genome Sciences in Rockville, could yield new entrepreneurial efforts.

Sirinakis said many big drug companies and foundations are starting their own venture funds, which could move more money into biotechs.

Still, “it’s going to take some time,” she said.

‘Activity in seed and early-stage’

Despite the low numbers in Maryland and the nation, Julia Spicer, executive director of the Mid-Atlantic Venture Association in McLean, Va., said she is optimistic for the Greater Washington region. Funding for regional startups grew to $17 million and 14 deals in 2012 from $2 million and 10 deals in 2011. Early-stage funding increased to almost $150 million and 70 deals in 2012 from $117 million from 62 deals in 2011, she said

While investment dollars in Virginia dropped to $374 million in 2012 from $617 in 2011, the number of deals rose to 81 from 76, according to the MoneyTree report.

Spicer said much of the drop in regional investment might stem from the falloff in late-stage funding, which typically requires larger deals. Late-stage funding fell to $340 million and 47 deals in 2012 from $700 million and 56 deals in 2011.

“We’re seeing a lot of activity in our seed and early-stage companies,” Spicer said. “We’re pretty encouraged about 2013. We have a robust entrepreneurial community. It’s not easy, but 2012 had strong momentum in the market.”