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On Friday, PricewaterhouseCoopers (PwC) in partnership with the National Venture Capital Association (NVCA) released its quarterly MoneyTree report showing that venture capitalists invested a massive $17.5 billion via 1,189 deals, nationally, during the second quarter of 2015.
In Washington, D.C., the storyline is slightly different. While VCs invested about $245 million through 49 different deals —11 more deals than during the previous quarter—local investment categorized as “seed funding” remains especially dismal. Through 2015 the funding category has only attracted $50,000 worth of investment via two deals this year in the D.C. area, according to report data compiled by Reuters.
In contrast, one of the most surprising national data points presented by the report shows that seed stage funding is up 85 percent from one year prior. Additionally, if one were to combine seed and early-stage deals, nationally, the total cash would account for about 54 percent of deal volume during the quarter.
Venture capital firms secured 650 deals with seed and early stage companies in comparison to only 549 with “expansion stage” and later stage companies. The PwC/NVCA MoneyTree report makes it clear that through 2015, institutional investors are increasingly focused on early stage investment opportunities.
Lack of D.C. seed funding
New Atlantic Ventures (NAV) co-founder and general partner John Backus told DC Inno that he believes the majority of “mega-seed” activity is occurring on the West Coast — as such the report's national data is largely influenced by that activity.
Several elements are contributing to the D.C.-area’s disparity in seed funding, Backus said, including an underdeveloped angel investor community, fewer "micro-VCs" and an ongoing market reclassification of the money involved in a seed round.
The prevalence of seed funding nationally is largely because seed investments are becoming synonymous with how a Series A round was approached five years ago, Backus told DC Inno.
For reference, Backus said that NAV, which focuses on early-stage investments, did not invest in a single seed round 15 ago (in 2000). Yet just last year, approximately 65 percent of the firm's investments were categorized as seed round. Even three years ago, $2 to $5 million seed rounds were unheard of, but today, Backus said, it’s a common occurrence.
Industry Potential
Early-stage investments, categorized by PwC/NVCA as a tier greater than seed round activity, accounted for $106 million in the D.C. area, according to the MoneyTree report.
When categorizing all 49 D.C.-area Q2 investment deals -- and the companies behind them -- a few industries stand out. Namely, biotechnology (Regenxbio, OriGene Technologies) and software companies (including Mapbox and Distil Networks). Arlington, Va.-based Distil Networks is a cybersecurity firm that specializes in protecting enterprises from bot-based attacks.
Backus told DC Inno that he believes the localized investment focus on biotech and cybersecurity has largely been influenced by the prevalence of two leading, locally-based federal institutions: the National Health Institute (NIH) and Defense Advanced Research Projects Agency (DARPA).
Talented alumni from these agencies typically establish companies close to home. And in many cases, their enterprises are capable of creating innovative, market leading products/services due to the top-class training the founders received and the network of contacts available to them.
Backus went on to highlight one NAV portfolio company—Invincea, a cybersecurity firm led by former DARPA Project Manager Anup Ghosh. Backus told DC Inno that with the cybersecurity market, the “sky is the limit.” But rather than comparing the industry’s potential to that of the late software boom in the early 2000s or the advent of the Internet, the NAV co-founder said it reminded him most of the space race waged between the U.S. and Russia.
A cyber arms race will escalate between the U.S. and China, he said, but a number of positive developments may come from it as well -- including the potential introduction mass venture capital investment into the region. Similar to the space race, Backus believes that the next great international technology race will also result in a number of technological breakthroughs. If this occurs, much of that innovation for the U.S. will occur in the D.C. area, specifically in Northern Virginia, where a cluster of rising cybersecurity startups have cemented themselves.
Regardless of whether we experience a cyber race, however, Backus said he thinks D.C. is set to have another "billion dollar year" when it comes to venture capital investment. In terms of ranking the D.C.-area against the top 10 investment areas mentioned in the MoneyTree report, he conceded to the fact that D.C. would be behind historically high-grossing private investment regions like Northern/Southern California and New York. "I think we'll come in at about 5th ... it's really a toss up between us and Boston."
