“The startup scene is starving for seed-stage investment right now.”
If you've ever spent time around a startup hub then you've probably heard some version of this comment before. Whether it's currently the case in the D.C. area may be a fair question, and one that we've put to venture capitalists from some of the region's most prominent firms—Revolution, New Atlantic Ventures and New Enterprise Associates.
What they told us is that the D.C. area appears to be facing a shortage of angel investors compared to other startup hubs in the U.S.—and that the region is badly in need of some more major exits to bolster the angel community.
As New Atlantic Ventures' John Backus puts it, “we have lots of tiny check writers here. But what we do not have here is scale or volume of ISS rounds (Institutional Seed Syndicates)—FKA Series A."
He defines these rounds as ones that are $2 million or greater and have multiple institutional investors, which can carry a startup through to an A or B round.
Not only does the D.C. area not have hundreds of such rounds, but "we don't even have dozens," Backus said. "In a given quarter you can count them on one hand.”
The data
According to a recent report from PricewaterhouseCoopers and the National Venture Capital Association, investors provided $575 million in funding to Metro D.C. companies during the first half of this year. But only $50,000 of that amount was considered seed-stage funding—down from $375,000 during the same period a year earlier (which isn't exactly a large amount, either, in tech terms).
The report, however, only includes investments made by institutional investors. Money being invested into the ecosystem by angel networks, family and friends rounds and individual accredited investors, were not measured.
Seed-stage funding is notoriously difficult to measure since reporting for such investment is typically voluntary (and therefore unreliable). In addition, many companies that are in such a position may also be in stealth mode—meaning that, at the moment, they are actively working to limit the amount of information out on the Web about their business, products and/or team.
Revolution partner Bobby Ocampo told me that, from his experience, there is simply a large number of early-stage companies who don’t see the benefit in publicizing early investment news. Though talked about less, it is also common for these young startup to not have marketing/PR teams capable of responsibly disseminating the information, Ocampo added.
So if the MoneyTree report—and its $50,000 figure—does not accurately represent local seed funding, then is the D.C. area really “starving for seed-stage investment?”
Maybe "starving" isn't the right word—but there is still evidence to suggest that angel-stage investing is, in fact, in (relatively) short supply in the D.C. area.
The situation
In an interview with DC Inno, NEA General Partner Harry Weller said that there are a number of outside influences, some even uncontrollable, which are contributing to the lessening of early stage investments in startups, locally.
Weller explained that the D.C. area, more so than other markets, is being hurt by a general “flattening" of the tech market over the last two quarters. “Sadly our region is highly correlated to that movement,” he said. In addition, Weller mentioned that he had seen a reactionary drop in seed funding, nationally, as firms are increasingly aware of the risk associated with them.
That being said, while there may be a drop occurring in early-stage investments, Weller said that the D.C. area is home to a particularly impressive class of middle-stage companies—specifically mentioning Luminal and TrackMaven.
Weller described these companies as businesses who were capable of surviving and coming out from D.C.’s competitive “startup petri dish.”
“The ones that are able to survive here; the quality of these companies is usually high. That’s why you see us [NEA] investing greatly in this area,” Weller told DC Inno.
Ocampo, who began working with Revolution in 2009, said that across the D.C. tech space he’s been impressed by company growth. That progress bodes well for the D.C. tech scene, as it’s likely that some employees from the medium to large companies will eventually spin-off and create their own startups, he explained.
From a VC’s perspective, Ocampo described that startups who are founded by professionals with a recognizable industry track record immediately have a leg-up when it comes to early stage investment. In essence, if the local tech scene can continue to grow and if that growth leads to a “cross pollination” of talented entrepreneurs, then early-stage investment should also occur more frequently.
What’s needed to grow the D.C. area’s angel scene
Weller and Backus both agreed that more D.C. companies need to “exit”—through a financially successful acquisition or IPO—for there to be a more vibrant local angel investment community.
Though there are several well recognized “tiny check writers” here in the D.C. area, as Backus described, including organizations like Next Gen Angels and Blu Venture Investors, it would be beneficial for early-stage startups to have a larger set of options.
There will need to be “very large exits” that can create a new cohort of wealthy individuals in the space.
Overall, an active angel investment atmosphere—which is certainly prevalent in other hubs like Silicon Valley and New York—has the potential to change the D.C. tech landscape from the bottom up.
Weller, who leads NEA’s East Coast venture practice, is an investor in several local tech companies, like Cvent and SourceFire (acquired by Cisco). For the area to have a more influential angel community, Weller describes, there will need to be “very large exits” that can create a new cohort of wealthy individuals in the space. These individuals include not just returning institutional investors but also employees within the companies that own stock.
Weller said that there has not been a “newly minted exit,” aside from the somewhat recent IPOs of Cvent and Opower, to instill a trickling down of money to encourage steady local angel growth.
Progress
In May, data storage giant EMC agreed to purchase Bethesda, Md.-based cloud enterprise provider Virtustream for $1.2 billion. Chevy Chase-based TDF Ventures, Baltimore city-based QuestMark Partners and Alexandria-based Columbia Partners were all early investors in Virtustream.
“As far as the local tech scene is concerned, I think an exit of this size is a very positive development. Big exits create liquidity for entrepreneurs and investors. If some of that liquidity finds its way back into funding other innovative entrepreneurs, then that’s great for the local tech scene as it creates a virtuous cycle,” Militello Capital COO and co-founder Matt Brady previously told DC Inno.
At the moment, however, it is unclear how Virtrustream’s exit has influenced the local investment scene, if at all.
Perhaps only time will tell, but Weller’s point remains an important indication that D.C.-area tech companies are not producing a substantial amount of exit opportunities for investors.
