Venture capitalists say market hot for funding

DATELINE: ANNAPOLIS Md.

Starry-eyed entrepreneurs, take note: Despite a downturn in the economy, local venture capital experts say there is plenty of startup cash lying around.

"Standards are getting raised, but more money is going out than ever before," said Jack Biddle, co-founder of Novak Biddle Venture Partners, a Bethesda firm that invests in high-tech companies. "If you have a good idea and a good team you can raise money."

Indeed there is more money to be had. Venture capital has steadily picked up since the tech bubble burst in 2000, said Emily Mendell, spokesman for the National Venture Capital Association. The industry has gained steam, backing companies with $29.4 billion last year, up from $23 billion in 2005, she said.

Companies have continued to receive startup money because venture capital firms base their decisions on long-term investments, not current economic conditions, she said. Still, the downturn in the economy could eventually have an effect if the market for taking a company public goes south. Investors make their money when a company goes public.

"If there is a recession, the stock market is not going to be terribly conducive to firms going public," she said.

Sam Medile, lead partner with the Capital Exchange Group, a new group that matches young companies with investors, put together an event at the Loews Annapolis Hotel this month showcasing entrepreneurial firms in the areas of technology and communications. He described it as a speed-dating event of sorts: Investors gathered in rooms to hear a company's pitch, and moved on to the next room to see another firm.

Among the companies were Zymetis Inc., which develops enzyme technologies for biofuel production, and Safe and Secure TV Channel, an interactive channel that covers security issues.

Medile said the event generated great interest from mostly angel investors, or wealthy people willing to fund small entrepreneurial efforts, but also venture capitalists who viewed the event as the "minor leagues."

"They look at these firms as they grow up," said Medile, a successful entrepreneur who co-founded Towne Park, a hotel valet parking company. "They want to keep track of those good players."

While making the right contacts is important, Medile said there are certain "investor flags" companies can be mindful of: Investors look closely at whether a company has performed enough due diligence on its concept. They also will look at the reputations of a firm's operational people who are running the business each day, he said.

Questions firms should always ask before making a pitch to a venture capital firm include: Have you spent the right amount of time on a concept? And do you "have a quality business plan that is not farfetched?", he said.

Chris Paladino, a member with the Capital Exchange Group and an angel investor, said young companies seeking money are often run by smart people with great ideas. But they aren't always the best business people, he said.

"Far too often it's all the sunny side," Paladino said. "You may very well be the best, but I don't care how smart you are, how good you are. Focus on what is unique and different. There are serious threats and competition out there."

For a company with nothing but a business plan and a good idea, "it's almost impossible to get venture capital," said Charlie Heller, an angel investor and chairman for the investment committee for Athlone Global Security. He said venture capital firms typically invest in companies with proven technology and sales.

More nascent companies, however, are better off going for angel funding and presenting at dinner clubs around the Washington area, said Heller, who is also part of Capital Access Network. The network connects startup entrepreneurs with angel investors.

Bill Karpovich, chief executive officer and co-founder of Zenoss, an Annapolis-based open-source software firm that just secured $11 million in follow-up financing, said venture capital firms want 10 times the return on their investment so it's important to tailor business decisions toward helping that company reach the "big win."

If you get into a deal with a venture-capital firm, it means giving up some control, he said.

By giving up a little control, "you then have the resources you need to turn your baby into something," he said. "If you've got the right market opportunity, it's a fair bargain."

On the Net:

Novak Biddle Venture Partners: http://www.novakbiddle.com/

National Venture Capital Association: http://www.nvca.org/

Capital Exchange Group: http://www.capitalexchangegroup.com/

Information from: The (Annapolis, Md.) Capital, http://www.capitalonline.com