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Second-quarter VC numbers strong locally and nationally

Venture capital investment in San Diego-based venture-backed companies hit its highest quarterly mark since the third quarter of 2012, with $294.04 million invested in the second quarter of 2014 according to Dow Jones VentureSource.

That is significantly higher than the $195.10 million VC dollars invested in the previous quarter, and slightly up from $253.86 in the second quarter of 2013.

Interestingly, this higher amount of investment was made through fewer deals, with 17 equity rounds completed in the second quarter, compared with 21 in the first. The health care sector was particularly strong, accounting for $108.52 million of the San Diego total investment in six deals.

Jeff Grabow, U.S. venture capital leader for Ernst & Young, said this was largely driven by four deals.

“San Diego had a strong venture capital quarter driven by four large deals in four sectors: health care, there was a deal in IT, a deal in business and financial services, and deal in renewable energy,” Grabow said. “When you look at those, four large deals drove the funding with $200 million out of $296 million in San Diego. That tells me you’ve got a healthy balance between companies scaling, as well as companies building businesses -- 25 percent of companies at scale, or later-stage rounds, and 75 percent doing earlier rounds.”

Grabow said dividing the remaining $96 million not accounted for in the four large deals by the 13 smaller deals in San Diego equates to a normal venture round of roughly $6 million or $7 million.

The national venture capital scene was also particularly strong in the second quarter, posting the highest total investment since the first quarter of 2001 with $13.8 billion in 917 equity rounds.

These numbers are up from 885 deals totaling $11.4 billion in the first quarter of 2014, and from $8.6 billion in 938 deals year over year.

“Financing rounds were up 5 percent quarter over quarter, but total invest was up 21 percent,” Grabow said. “It was driven by strong activity in consumer services and health care, but the IT sector saw a decrease in software funding.”

Nationally, three of the four health care subsectors saw increases in funding: biopharmaceuticals was up 16 percent in terms of dollar volume, health care services increased significantly, and medical software and information services was up more than 100 percent, but from a smaller base than the other areas.

San Diego’s neighboring metro area venture capital hubs also did fairly well in the second quarter. The Los Angeles metro area raked in $370.36 million in 37 deals, up from $212.70 million from 28 deals in the first quarter, and up slightly from $367.71 in 41 equity rounds year over year.

Orange County’s numbers took a small dip, from $188.70 million in 16 rounds in the first quarter to $176.68 million, also in 16 deals, in the second quarter and from $182.50 million in 13 deals in the third quarter of 2013.

Also of note in the 2Q 2014 VentureSource report, both the amount venture capital funds raised and number of funds dropped from the first quarter -- funding by 28 percent and number of funds by 5 percent.

Grabow said this is normal since investors go to the market at different times, and it ensures a balance between funds raised and funds invested, so as not to recreate the imbalance seen in 1999 to 2001, when more than $180 billion was raised in those three years that then needed to be deployed.

“We don’t want too much capital going in, because then you’re forced to overfund,” he said. “Having a balance is critical -- we can’t get ahead of ourselves too much.”

The national mergers and acquisitions and IPO market also took a hit from last quarter, but were improved from last year.

There were 16 percent fewer mergers and acquisitions in the second quarter than the first quarter, with a 26 percent drop in value from those in the previous quarter. The market was stronger than the second quarter of 2013 however, with 108 mergers and acquisitions compared with 91 year over year, with a value increase from $9.2 billion to $12.6 billion in the second quarter.

The number of IPO deals with venture-backed companies fell 34 percent and capital raised fell 26 percent from the first quarter of 2014, though the number of IPOs increased from 20 in the second quarter of 2013 to 25 in the second quarter of 2014, with respective values of $1.8 billion and $2.18 billion.

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