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Venture capital outlook:

Tech attracts dollars but early-stage companies get stuck

The biotech and technology industries in San Diego continued to act as money magnets in 2012, but startups are having a tough time locking down dollars.

"The strength in San Diego's life sciences industry propelled our region to a five-year high in venture capital funding," said David Titus, president of San Diego Venture Group.

Information technology, which incorporates communications and networking, electronics and computer hardware, semiconductors and software, pulled in $156.68 million venture capital dollars for 23 deals, according to a report from Dow Jones VentureSource.

That sum was down from 2011, however, when $325.21 million went toward the same amount of IT deals.

Nationally, IT continued to attract investors throughout 2012, accounting for 33 percent of the total venture capital investment, said the report.

"It is likely venture investors will be cautious in 2013, as their own fundraising results slowed by about 10 percent," Titus said.

Locally, biopharmaceuticals raked in $418.55 million for 24 deals in 2012, slightly up from $394.67 million raised in 2011 in the sector, with 27 deals. Included in that figure was a $50 million investment in biotech therapeutics company Ambit Biosciences Inc. at the end of the year.

Other notable fourth-quarter deals in the technology space included software company Independa Inc.'s $5 million round and biotech Auspex Pharmaceuticals Inc., which raised $25 million.

Diagnostics and "personalized medicine" continue to be an area of strong interest and San Diego is the leading area in those fields, Titus noted.

Medical devices and equipment scored $225.41 million VC dollars in 2012, up from $114.78 million a year earlier. La Jolla-based Epic Sciences Inc., a developer of diagnostic tests to facilitate personalized medicine in cancer, closed a $13 million round in November.

"We also sit at the intersection of wireless communications and health care, which are gathering even greater venture dollars," Titus said. "San Diego should benefit as investor attention shifts away from the consumer and back to the enterprise."

Investments in consumer services -- which includes retailers, travel and leisure -- totaled $19.8 million in 2012, a drop from $27.34 million in 2011.

San Diego-based ServiceNow (NYSE: NOW), a venture-backed software company, completed one of 2012's most successful initial public offerings and currently sports a $3.5 billion market cap.

While tech investments took center stage in 2012, the majority were for later-stage companies.

"The large number of early consumer Web and software companies funded by angel investors will be competing for funding in a VC market that is not growing," Titus warned.

That means the land for startup funding is becoming more desolate.

"For smaller companies in the $1 million to $10 million range, I haven't seen much improvement in the past two years," said Jack DeFranco, president and CEO of San Diego-based Targeson Inc.

The ultrasound molecular imaging company has instead relied on public, not private, dollars. In October the company received a notice of award for $551,200 for continuation of the company's SBIR Phase 2 grant, funded by the National Institute of Diabetes and Digestive and Kidney Diseases.

The quest for Series A funding is a tough journey these days, agreed other biotech leaders.

"There is a series gap. It has a lot to do with the venture capitalists' ability to convert that investment into a return," said Timothy Scott, president of San Diego-based Pharmatek.

Two decades ago, he said, a VC could put $5 million into a company and go public in a couple of years. Those days are long gone.

"You have to look for a pharmaceutical company to buy your technology and that is certainly where the money is," Scott said.

For example, Eli Lilly & Co. (NYSE: LLY) has a venture unit that's interested in pursuing companies that could be of interest to Eli Lilly today, as well as any other therapeutic area where there's a high unmet medical need.

Lilly Ventures has invested in San Diego-based companies since day one, and its first fund was just shy of $200 million.

3D Robotics was one of the lucky local ones to score early-stage financing in 2012. The provider of parts and technology for personal unmanned aerial vehicles closed a $5.1 million round in November.

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