Last summer, a task force was formed at the behest of Connect to explore solutions to the lack of local venture capital in San Diego, without which early stage companies are crippled. The nonprofit, which helps build tech and biotech businesses in the county, also launched a multi-pronged offensive to address the issue of funding. Half a year later, some answers are emerging.
The task force is headed by Dave Titus of Winward Ventures, who recently became the managing director of strategic initiatives at the San Diego Regional Economic Development Corp. About 15 people sit on the committee, prominent figures drawn from local industry associations such as BIOCOM, CommNexus and Clean TECH San Diego, as well as from venture capital backgrounds. They meet monthly and discuss ways to bring more venture dollars into San Diego.
The group looked at issues such as out-of-town investors investing in mid- to late-stage companies, and the handful of local VC firms lingering in maintenance mode, making little or no new investments.
The task force is looking at the funding issue from all directions -- how to obtain more government support, VC and angel funds, corporate dollars and how to create partnerships.
Mason Matthies, who heads the nonprofit San Diego Venture Group and sits on the task force, organizes an annual VC Summit that brings about 150 to 200 investors to town. SDVG also organizes monthly breakfast meetings with keynote speakers who focus on core issues in funding.
Matthies said he has seen companies get funded recently, obtaining larger rounds than they did before for Series A and B. While he agrees that we do need better access to VC firms, he said getting VC firms to travel down south from the Bay Area is not an issue he has encountered at SDVG.
Also, VCs now eschew the previous trend of looking at early stage companies with a short-term exit strategy in mind, and are beginning to look at the long term.
Addressing the issue of why many technology sector companies move out of San Diego, Matthies said obtaining funding was not the reason for exodus.
"I don't think moving to the Bay Area is the answer to get funding. Those in a good niche will be able to attract funds right here," Matthies said.
He cited Active Network, which creates online registration and event management software, as an example. It has bucked the relocation trend and remained in town. Entropic Communications (Nasdaq: ENTR) is another example he gave, a fabless semiconductor company that has done well by staying in town.
"The issue we have is that our middle management talent pool is limited," Matthies continued. "When promising companies get acquired, unlike in Orange County or elsewhere, middle management does not have a lot of opportunities to support themselves locally within the sector."
He believes that expanding the local talent pool will help. Connect and the task force have gained a lot of momentum toward this goal, according to Titus and Matthies.
Duane Roth, the head of Connect, announced five initiatives last August: seeking more federal funding; appointing a full-time lobbyist in Washington, D.C.; creating more research institutes; creating a regional seed fund program; and promoting the development of more technology clusters in fields such as cyber security, sports innovation and contract services.
Roth also worked for several years on what he calls the distribution model for startups. A paper he co-authored on this model published by the Kaufmann Foundation calls for passing the product forward through collaboration and partnering rather than trying to pass the company forward.
"I am suggesting we focus on products, not companies, and then pass it forward. A single idea may not work, but if you worked on 10 or 15, and one or two out of that work out, then you can pass it forward. The model that worked for the last 25 years will not work for the next 25," he said.
Roth pointed out that while we have a lot of research going on locally, it is half of what Boston has and about 10 percent of what exists in the San Francisco Bay area. He said the discrepancy is due to the lack of capital.
While not a unique phenomenon, as other regions have the same issues, Roth said we need to look at investing differently.
"There are the known knowns, known unknowns and then there are the unknown unknowns," said Roth, quoting former Defense Secretary Donald Rumsfeld. "You can't anticipate all of it while you build a company. The burn rate on dollars is extremely high when you build the entire infrastructure, so the deadlines become tight and there is no room for error. This is why companies fail."
He advocates instead that companies bypass in-house infrastructure and contract for it. "The efficiency of the infrastructure model was about 1 to 20 percent, but the cost was 100 percent. So any setbacks reflected also on the cost of the infrastructure. Today, you can store data in clouds instead of in your own lab; you can pass the control forward, license the technology, outsource the clinical trials."
His distribution model calls for working independently and coordinating with others, so the glue that holds everything together will be the contract services, for prototype development, testing, equipment, etc.
Roth pointed out that the contract services industry has a considerable presence in San Diego but no visibility, so part of Connect's effort is to highlight the benefit of taking advantage of what the industry has to offer.
He is also heading to Washington, D.C., this week to take part in a meeting that will explore how to commercialize technology transfers.
The group will focus on learning from the successful model of two proof of concept innovation centers, one that is right here in San Diego -- the von Liebig Center at UCSD, and the other, the Deshpande Center at MIT.
Both were established with the idea of stoking innovative research being conducted by students and faculty at the universities. The von Liebig center has handed out $2.8 million so far and funded about 66 projects. The Deshpande center has handed out $7 million toward 64 projects.
The meeting in D.C. will explore whether the success of these two centers can be duplicated elsewhere.
Roth has made considerable progress on the initiatives he announced last summer. The D.C. office of Connect was just opened and a lobbyist will be appointed soon.
This person will be an advocate for San Diego, representing the city in debate about intellectual property and trade protection policy; and will seek research funding -- Roth pointed out that every time the Department of Defense or the National Institute of Health budgets go up, San Diego does well.
The lobbyist will advocate work force development, including issues like work permits for foreign-born talent trained in our graduate schools.
"I want to keep people who come to our grad schools right here. We need someone to speak out for us so we can retain this talent," Roth said.
The advocate in D.C. will also look into regulation from the FDA, FTC and the EPA.
Connect also spun off the Sports Innovator in the last two years, along the lines of Clean TECH San Diego, which focuses on bringing together companies involved in renewable energy and sustainability.
Roth said the Sports Innovator has moved into high gear, headed by Bill Walton, a star player with the UCLA Bruins in the '70s and a former ESPN broadcaster.
There are 600 companies in this sector, focusing on skateboards, surfboards, golf clubs, bikes, gaming and apparel. He said Connect is working on forming more clusters, in the areas where it sees opportunity.
With all of the efforts coming together, Roth expects to see the effects within two to three years, in the form of increased funding, easier access to capital and technology, and more local innovation.
Nagappan is a San Diego-based freelance business writer.