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Venture capital slump misses San Diego

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San Diego bucked the national venture capital trend in the third quarter, posting a 20-percent increase in dollars attracted while the U.S. average stalled, according to a report from industry tracker Dow Jones VentureSource.

The region drew $248.0 million in 29 deals in the third quarter, compared to $203.9 million in 24 deals in the second quarter.

“There’s no question that we’ve seen an upturn,” said Jeremy Glaser, a San Diego-based partner with Mintz Levin’s Corporate Group, noting that he is hearing of more new deals now instead of just recapitalizations of portfolio companies.

“Things have been getting better pretty much each month since June, both on venture capital side and in public markets.”

The third-quarter figures bring the year-to-date total to $646.5 million in 68 deals and are slowly approaching the $295.8 million in 20 deals reported in the third quarter of 2008.

More than half of the dollars and deals went to health care, primarily to biopharmaceuticals and medical devices and equipment.

The largest published regional deal was a later-stage round of $19 million that went to San Diego-based DriveCam, although larger local unpublished deals -- such as startup V-Vehicle’s $62 million financing round -- have been publicized earlier in the year.

San Diego is positioned well in the strongest-performing industries at the national level, said San Diego-based Ernst & Young partner Dan Kleeburg, specifically highlighting biopharmaceuticals, medical devices and green technology as sectors “that play to the strength of the San Diego business environment.”

San Diego venture capital investments should see steady growth in the fourth quarter as well, experts agree. Glaser said he closed four rounds in September alone and is about to close another.

“I don’t want to make it sound like we’re in a boom; that’s not the case at all,” Glaser said. “But from my conversations with VCs and my personal practice, it’s clear that we are no longer frozen and we’re no longer going down.”

Things will remain slow, Kleeburg agreed, as venture capitalists take their time evaluating potential deals and limited partners pull back on replenishing VC funds, which hinders the ability of a VC to make new investments.

“It’s not jumping-off-the-chart-type growth,” Kleeburg said, “but I’ll take the steady growth over decline.”

Comparatively, Orange County attracted $65.8 million in nine deals, less than half the venture dollars seen in the quarter before. VC investments in Los Angeles companies remained flat at $95.1 million in 22 deals in the third quarter.

The Southern California region collectively saw $498.0 million in 66 deals, mirroring the national trend of fewer dollars in more deals.

The San Francisco Bay Area remained the state’s big winner: San Francisco companies garnered $2.2 billion in 183 deals -- also a 20-percent increase in dollars.

On the national level, venture capitalists invested $5.1 billion in 616 deals in the third quarter, down 6 percent from the $5.4 billion put into 595 deals during the second quarter.

“The slow recovery we’ve seen for venture capital has faltered,” said Jessica Canning, director of global research for Dow Jones VentureSource, in a statement. “As liquidity and fundraising lag after the economic meltdown in 2008, investors have no choice but to keep a tight rein on investments until the industry is on more solid ground.”

Information technology took back the top slot for investments after health care outpaced the sector in the second quarter.

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