Creating more than 2,000 new jobs, unlocking millions if not billions of dollars in private capital and launching the next MedImmune in Maryland — these are the dreams behind Maryland's latest strategy for fostering high-tech businesses in the state.

For years, officials said, Maryland's early-stage businesses have faced what the industry calls "the valley of death," the difficulty in obtaining funding between the company's startup and when larger investors step in to help ramp up commercialization. Some give up after falling short of their entrepreneurial goals with the lack of funding, while others have sought better prospects in other states. But there are those that continue to fight to forge their futures in Maryland.

These and other companies that might follow in their footsteps are the targets of InvestMaryland, Gov. Martin O'Malley's plan to raise $100 million to inject into the state's venture capital market and businesses. The plan is contained in a bill that would allow the state to offer bids on tax credits to insurance companies in exchange for program funding.

"This program will not help us become the next Silicon Valley; it will help us become the next Maryland," said David Troy, co-founder of the Baltimore Angels, which specializes in early-stage information technology startups.

Troy was part of a panel that discussed the bill during a gathering Wednesday at the Miller Senate Office Building in Annapolis. About 300 business people, investors, legislators and government officials attended InvestMaryland Day to learn about the program or show their support for it.

Tough road for startups

"There is still a tough road ahead for early-stage companies. Money's harder to come by. But we have to nurture these companies if we want to be an innovation state," Steve Dubin, CEO of Martek Biosciences Corp. in Columbia, said in an interview. "It took [Martek] 16 years to get to profitability. It takes even longer now to get a product out the door. I don't know if we could do it today."

Martek, which produces baby formula nutritional supplements, recently was sold for $1.1 billion to Dutch life sciences and chemical company Royal DSM. Martek is a graduate of the University of Maryland's Maryland Technology Enterprise Institute in College Park.

As a speaker Wednesday, Dubin said the state investments in early-stage companies will have a bandwagon effect, bringing in new investors.

"It's the first dollar in that makes everyone take a second look," he said.

And there is funding to be found, said Malcolm T. Meeks, managing director at Ebinport in Crofton.

"Capital is scared, not scarce," he said. "Things are still tight, but we're seeing signs of optimism." Ebinport helps companies make money off their patents.

Although the Great Recession largely cut off capital, it didn't cut off research and development throughout the state, said Christian Johansson, secretary of the Department of Business and Economic Development. The state must ensure commercialization of that research happens here, he said.

DBED co-sponsored InvestMaryland Day.

Maryland Venture Fund success

InvestMaryland supporters hope to see it yield results similar to those created when the state began investing in startups 16 years ago with the launch of the Maryland Venture Fund.

Among the fund's success stories are cybersecurity companies Tenable Network Security and Sourcefire, both in Columbia. Tenable received a $250,000 Challenge loan and repaid it four years later. Sourcefire received $650,000 through the enterprise fund and several financing rounds and later went public, returning $3.2 million to the state, said Frank Dickson, the fund's program manager.

"There's a number of viable and good companies to put money into. Now is a great time to invest. If you're willing to write the check, you're more likely to get returns than previous because valuations on companies have gone down," and companies are hungry, Dickson said.

Of the $100 million InvestMaryland would provide, 37.5 percent would go into the enterprise fund; half would go to private venture firms. These firms would have a state office, equity capital of $500,000 and at least two people with five years of experience in venture capital financing. The remaining 12.5 percent would go to the Maryland Small Business Development Financing Authority, which provides loans to socially or economically disadvantaged entrepreneurs. The authority is managed through the Meridian Management Group in Baltimore.

The venture fund has been successful, Dickson said, referring to the "fantastic" return it has shown — $62.3 million on an initial investment of $25 million in fiscal 1994. But with a proposed initial investment budget of $1.4 million for fiscal 2012, the fund's cash balance will hit zero by July 2012, he said.

Evergreen fund sought

Eleven states already have investment programs similar to InvestMaryland, Dickson said, but the main difference in Maryland's proposal is that calls for participating venture capitalists to return 100 percent of the state's principal. It also provides for an 80-20 split for additional profits through the investment, akin to conventional venture capitalist models. The idea is to create an evergreen fund that keeps replenishing itself, Dickson said.

"This real alignment of interest between the taxpayers, state, venture investors and business is the first time I've seen something like it. It's critical right now," said Robb Doub, a general partner at New Markets Venture Partners in Fulton. He said New Markets once invested frequently along with the Maryland Venture Fund, but he has seen a noticeable downturn in early stage investing. New Markets focuses on early stage and seed companies.

Although companies are easier to launch — startup costs are about $100,000 today, compared with $1 million several years ago — most investors have grown wary and choose to leverage their investments in companies at less risky stages, Doub said.

Robert Rosenbaum, president and executive director for the Maryland Technology Development Corp., which also offers funding to startup tech businesses, said the natural venture capitalist cycle has been thrown off course. Where new investors, with more interest in taking risk, would normally be taking the place of the larger investors who move on to later-stage firms, no new investors are stepping in, Rosenbaum said during a Senate hearing on the InvestMaryland bill later Wednesday.

"This program fills the gap until the natural cycle comes back," he said.

Is $100M enough?

But others, including Mario Armstrong, president of Mario Armstrong Media in Baltimore, wonder whether $100 million is enough.

"One hundred million is a drop in the bucket, but this is a tough budget cycle," he said. "It's a jump-start to get that movement going."

In contrast, Maryland companies received a total of $357 million in venture capital in 2010 and $295 million in 2009, according to the MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson Reuters.

Stanley W. Tucker, president of Meridian, also countered questions about the program's size and whether it should be more narrowly targeted.

"This spreads the risk and allows the state to leverage its investment," he said.

Dubin also warned not every company that receives an investment sees success and that what might be the "cool technology" of today could be something else tomorrow. He said a lack of diversity would be short-sighted.

"We need a lot of companies. We can't pick the winners and losers," Troy said.

Most small high-tech business struggling to get to the next stage without funding fail, said Jian Wang, president and CEO of Biofortis, which produces research and medical informatics in Columbia.

"Even a little investment can make the difference," he said.

lrobbins@gazette.net

How InvestMaryland works

-Insurance companies bid on tax credits. Bids start at 70 cents per dollar of tax credit, up to $100 million.

-Maryland Venture Fund Authority, a seven-member group appointed by governor with Senate's consent, hires third party to conduct bidding and approve venture capitalists.

-State invests $50 million in qualified venture firms, $37.5 million in Maryland Venture Fund and $12.5 million in Maryland Small Business Development Financing Authority.

-Venture firms invest in qualified Maryland companies.

-20 percent of tax credits are issued to insurance companies each year starting in 2015.

-Venture firms return 100 percent of the state's principal. Other distributions are split 80-20.

-Creates more than 2,000 new jobs and supports 200 to 400 businesses.

Source: Department of Business and Economic Development