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Local VC investment on the rise

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Dollars funded from venture capitalists to local companies soared to $342 million in the first quarter of 2004, the highest total in nearly three years, according to the Ernst & Young/VentureOne Venture Capital Report released last month.

Health care companies, particularly those in drug discovery, accounted for most of the gains with 12 deals raising $252 million. The second highest industry was information technology with 10 deals totaling $78 million and followed by retail and consumers/business products and services with three deals for $11 million.

It was the busiest quarter for venture capital funding in San Diego since the second quarter of 2001, when 28 deals funneled $458 million to local businesses. There were 25 deals in the first quarter of 2004 as funding jumped 55 percent from the same time last year.

"I think the biggest thing you get out of the results is that investing levels are back where everybody wants to see them and now we're starting to see more manageable, intelligent growth," said Don Williams, a San Diego-based venture capital advisory group leader for Ernst & Young.

Venture capital funding is closely followed because it indicates the relative strength of emerging local companies. It's also used to track future hiring plans since companies with new money are likely add employees.

The first quarter results ended a two-quarter slide in venture financing here. Although this was only the third quarter-over-quarter increase in the last eight quarters, analysts hope increased broader nationwide funding will ignite the IPO market and rejuvenate a mergers-and-acquisitions market still cooling from the tech bubble burst four years ago.

According to a different survey from the same Ernst & Young/VentureOne team, venture capital financing nationwide topped $5.1 billion in the first quarter, up 20 percent from the same period last year. However, the total number of deals dropped 2 percent to 465.

A separate report shows venture capitalists invested $4.6 billion nationwide last quarter. That represented a 10 percent increase from the same time last year, when venture capitalists invested $4.2 billion in startups, according to data compiled by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association.

Among the biggest deals in San Diego, according to Ernst & Young/VentureOne, were:

  • Farville Inc., a local biotech developing targeted immunotherapies for cancer and autoimmune diseases, raised $44 million in Series C private placement. Earlier this month, the company filed paperwork for an IPO.
  • Kemia Inc., a San Diego drug discovery firm, raised $33.5 million in Series B financing. The company's lead drug is to begin human testing next year.
  • Astute Networks Inc., a maker of computer processors, raised $15 million in second round financing. The company raised $16 million in 2001. The recent uptick in venture capital investment has coincided with an upturn in high-tech stocks since the end of 2002. The about-face has boosted the value of previous venture capital investments and made it easier to sell stakes in startups through initial public offerings of stock.

    The investment pace still lags far behind the frenzied days of 1999 and 2000 when venture capitalists poured $160 billion into startups -- an average of $20 billion per quarter.

    Few venture capitalists expect -- or even want -- those times to return.

    "I don't think we should be looking for some enormous rebound (in investments) because that is not going to happen," said Ted Schlein of Kleiner, Perkins, Caufield & Byers in Menlo Park, Calif.

    The Associated Press contributed to this report.

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