Report lobbies for local funding
Startups often have to look outside Maryland for venture capital financing
Baltimore needs a more robust financing system to help small businesses grow and to attract new companies.
That’s the conclusion of a new report by the Johns Hopkins University’s 21st Century Cities Initiative, which evaluated access to venture capital funding and loans for startup companies and more established Main Street small businesses.
The report found that while the amount of venture capital flowing to startup companies in Baltimore has grown significantly in recent years, much of the money comes from far-flung investors. Lending for small businesses also has been on the rise, but still falls short of pre-recession levels.
Without access to the capital they need, startups and small businesses may struggle to grow and could even be inclined to leave the area in search of stronger financial support.
“Our financing systems here have a lot of strengths,” said Ben Seigel, executive director of 21st Century Cities, a research initiative that focuses on social and economic issues in cities. At the same time, he said, “what we’ve seen is there is a lot of fragmentation. We could be getting a lot more out of the system we have.”
The report is based on data collected by studying investments in Baltimore-based companies through 40 public and private funding sources between 2000 and 2016, and interviews with more than 50 banks, investment firms, and other financing and business support organizations.
To improve the flow of cash, the report recommends the city and business community make a more concerted effort to connect businesses and investors. Local banks and venture capitalists could be passing over investment opportunities in their backyard because they are unaware of the companies.
“I think there are investors in Baltimore that are not seeing the opportunities,” said Mary Miller, a visiting senior fellow at 21st Century Cities and the report’s lead author.
Venture capital investments in Baltimore startups have grown to exceed $200 million a year, a significant leap from $50 million a year eight years ago, according to the report.
But about 60 percent of those investors are based outside Maryland, which could lead to more companies leaving the area in pursuit of cash. Already about 30 percent of startups in local incubator programs leave the area in search of their first financing, the report found.
“When you look locally, it can be challenging to access funding from investors,” said Robert Lord, CEO of Protenus, a Baltimore startup that develops security tools for electronic health records. “We have some great firms in town, but really, as a state, our financing from a venture perspective is intended to hit singles and doubles.
“It’s not designed to hit home runs.”
Lord said he and co-founder Nick Culbertson faced pressure to relocate when they began searching for funding but eventually landed investors who supported the company’s decision to stay in Harbor East.
In July, Protenus closed a $7 million funding round led by Oakland-based Kaiser Permanente Ventures and F-Prime Capital in Cambridge, Mass.
For young startups, a venture capital investment isn’t about money alone. Investors often play an important mentorship role for entrepreneurs, a relationship that benefits from living close to one another, said Jen Meyer, CEO of Betamore, an incubator and startup support organization in Baltimore.
That’s a perk Chris Sleat is looking forward to. His education technology company, Workbench, offers a technology platform that teachers can use to create hands-on lessons. The firm recently raised about $2 million in seed funding, with Brown Advisory, which has offices in Baltimore, as the lead investor.
The new investment brings Workbench’s total equity funding to $5 million.
The report also found that growth among traditional small businesses may be lagging because of insufficient access to loans.
While lending to small businesses in Maryland has trended upward since the recession, loans to Baltimore-based companies have lagged, in part because of consolidation among community banks that traditionally have been a key source of financing for local businesses.
Local banks are more likely to provide bigger working capital loans than national banks, which often focus on credit card loans, according to the report.
The report recommends enhancing the local lending capacity, by training more lenders in loans backed by the U.S. Small Business Administration, which can be more complicated to process than standard smallbusiness loans. That’s what Howard Bank is trying to do. The Ellicott City-based bank recently brought on a loan officer who specializes in SBA loans, said James Witty, Howard’s chief commercial banking officer.
In addition to developing its SBA loan program, Howard Bank is focused on building up its traditional business lending, as well, he said.
“We think it’s important both for our community and for us,” Witty said. “We see it as a good business line for us.”