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Venture capital climate for tech companies improves nationally, mixed trends locally

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At the national level, things are looking up for people who are seeking venture capital investments to launch and grow technology companies. While data does not suggest a return to the heady days of the dot com boom of the late 90s, venture capital investments showed a marked increase in the first quarter of 2011. According to the National Venture Capital Association, $5.9 billion in venture capital was invested in 2011, the second strongest quarterly showing in more than two years. Much of this funding is clustering around early stage, expansion, and later stage companies with proven products and business models. Deals for startup companies seeking seed capital continue to comprise a much smaller percentage of venture capital investment activity.

The technology industry, once the uncontested darling of venture capitalists but severely hit during the economic slowdowns of the 2000s, is beginning to see robust investment again. This is particularly true in software and biotechnology. Yet according to National Venture Capital Association data, other industries such as energy, cleantech, and medical devices are proving strong competition in drawing the attention and investments of venture capitalists as well, contributing to a venture capital investment environment that is more diversified than in years past.

In San Diego, Connect -- an organization that has been bringing together inventors, entrepreneurs and investors for more than 25 years -- reported that local venture capital investments were actually down in the first quarter of 2011 compared to last year, with $100 million invested locally compared to $218 million in the first quarter of 2010. Still, key industries such as biotechnology did well, bringing in more than 75 percent of the venture capital dollars.

Political and economic development stakeholders continue to focus on ways to further support local venture capital activity in a way that nurtures forward-thinking companies that call San Diego home. The San Diego Venture Group recently hosted the San Diego Venture Capital Summit, spotlighting “San Diego’s Coolest 25 Companies” and bringing together local venture capitalists in an environment of networking and conversations. A wide array of technology companies, from biotechnology to energy, Internet services to software, were represented at the event.

James Irish, president of instaVin, an Internet service that provides car vehicle information, attended the event as his company was listed among the “25 Coolest.”

“We have only been seeking venture capital for about a month as we are an early stage company, but this event was terrific in helping us forge connections with venture capitalists,” Irish said. “We have several follow-up appointments already scheduled.

Other attendees such as Rick Puetter, president and chief scientist of Pixon Imaging, which develops image processing algorithms, had sentiments aligned with emerging at the national level.

“In general, the availability of money seems to be slowly increasing and has improved since last year,” Puetter said. He also feels that there is reason to be particularly confident about the direction of local venture capital opportunities. “While the greatest source of money still seems to be associated with San Francisco Bay area venture capitalists, there has been signification increase in the availability of funds in San Diego and the surrounding area,” he said. Puetter noted that his company is even entertaining conversations with venture capitalists abroad, including in Canada.

Still, while the venture capital climate is improving, few companies seeking capital see a return to an era of free flowing capital based simply on good ideas.

Instead, venture capitalists are seeking proven products and are asking a lot of questions about existing cash flows, replicability and engagement with worldwide markets, according to Irish. Puetter noted that many venture capitalists are interested in the possibility of being a first and exclusive investor.

Nurturing local venture capital investments and the companies that benefit from these funds is a critical part of San Diego’s economy, particularly in key growth industries such as biotechnology, medical devices and telecommunications, which make up a growing part of the local economy. According to the 2009 Global Insight study, venture capital-backed companies are responsible for 12.1 million jobs in the United States.

Locally, many of these venture capital-backed companies and associated jobs are the type of high-wage, high-skill jobs that are central to supporting a healthy and robust San Diego economy.

-Bouris is a San Diego-based freelance writer.

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