The local venture capital environment took a tumble in 2013, posting $768 million in investments in local companies, down from $1.2 billion in 2012 according to PricewaterhouseCoopers National Venture Capital Association MoneyTree Report.
But the first quarter of 2014’s stronger results, with $242.9 million flowing into local companies compared to $203 million in the first quarter of 2013, proved what many industry leaders were saying: 2014 is going to be a big year, for a few reasons.
“First, a lot of the members that I’m talking to in the [National Venture Capital Association] have a much rosier prediction for 2014 when it comes to fundraising,” said Bobby Franklin, president and CEO of the NVCA and a speaker at the San Diego Venture Group’s VC Outlook 2014 in January.
“They think it will be a bit easier. I’ve had a couple go on record with the press and expect it to be upward of the $20 billion range, as opposed to the $16 billion we saw this year. And the second, and perhaps more important, is the improvement in the exit environment.”
That exit environment wasn’t really an issue in San Diego in 2013, and may explain the drop in VC dollars, since the local environment is highly concentrated in the biotech and life science clusters. San Diego Venture Group President David Titus said there were at least eight local biotech IPOs in 2013.
That strong exit and liquidity market is expected to continue, but not detract from VC investment this year. Frank Muto, a partner at Cooley LLP and chair of the firm’s business department, said firm-wide, Cooley has already facilitated 28 IPOs in the first six months of 2014 alone. He said he doesn’t expect any major improvements in the funding environment in the second half of 2014, but rather a continuation of the slow but steady improvement seen since the recession.
“People have more appetite for risk, are more willing to put their money to work,” Muto said. “So I don’t foresee a dramatic shift, but the market will be better and healthier. I think in the world of capital, sentiment builds slowly and then you get momentum. Coming out of 2008 was an extremely tough time and it took a while on the front end to rebuild the level of activity. So I don’t expect any dramatic changes, but healthy increases in VC activity.”
Taking a bit of a different approach, Kevin Kinsella, founder of local Avalon Ventures, said his VC firm doesn’t pay much attention to the statistics of money going in or deals coming out of the region, and instead focuses on investing in early stage tech and biotech companies that they see have potential. So while he couldn’t comment on trends in the VC environment, he did say that San Diego is lacking in tech startups ripe for investment.
“We’ve pretty much had a steady helping of startups,” Kinsella said. “I do wish there was more venture activity in San Diego than there actually is, though. We invest nationwide so we see tons of activity in San Francisco, in New York, in Boston, but less so in San Diego.
“As I think back to the ‘90s and before the crash, there were a lot more opportunities in San Diego than there ostensibly are now. We don’t have to bar the doors -- I wish there was more, activity but there’s not.”
Kinsella said he and Avalon are happy with the biotech environment here, but would love to see more opportunities in the software, Internet and traditional tech space.
“We would love to see more opportunities that offer the long-range possibility of being a company,” he said. “Because you’ve got, when talking about software or tech products, you have features, products and companies. And the last significant tech-oriented company that grew into billions of dollars of sales and tens of thousands of employees, etcetera, was founded 30 years ago and that was Qualcomm. There’s not been a Qualcomm-sized success story since then.”
In terms of deal flow, PwC recorded 23 deals totaling $242.98 million in San Diego in the first quarter of 2014, down from 27 deals and $203.41 million in the first quarter of 2013 and 26 deals valued at $382 million in the first quarter of 2012.
The VC market numbers from the second quarter of 2014 are expected to be released at the end of July. If these experts are correct, look for slight increases in funding and deal flow, as well as continued strong exit and liquidity results.