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Local VC approaches pre-recession levels

Investments in San Diego top $1 billion for first time since 2008

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After hibernating through much of the Great Recession, venture capital funding in San Diego County jumped roughly 20 percent last year to $1.1 billion -- the first time since 2008 that the funds crossed the billion-dollar mark.

"San Diego companies attracted more venture capital investment than Texas, Colorado or the corridor around Washington, D.C.," said David Titus, president of the San Diego Venture Group (SDVG), an association of local VC investors and funds.

Titus added that the Southern California region -- including Los Angeles and Orange counties -- tied with New England as the second-largest target for VC funding after Silicon Valley.

That trend seems likely to continue this year, with VC funds projected to rise 13 percent to $1.4 billion, according to a forecast this week by Point Loma Nazarene University.

Despite the rebound, however, today's VC market is significantly different than it was before the recession.

The pension funds and large institutions that have historically provided VC firms with much of their money have given way to family money and corporate investors who don't necessarily have the deep pockets that once provided funding.

Partly as a result, many VC firms are becoming more conservative about startups, investing within the relatively low range of $500,000 to $5 million instead of the tens of millions they once might have made available.

Joshua Green, general partner of Mohr Davidow in Silicon Valley, described the shift to that funding level as "an incredibly positive thing" since it allows investors to figure out which ideas have traction.

"We're seeing fewer dollars but at the same time less money is needed to get to value [a return on investment] on startups," Green told an SDVG-sponsored forum of around 330 VC representatives and investors on Thursday. "As a result, even though VC firms nationwide are raising less money, more startups are getting funding."

Green said in general, information technology firms, such as software producers, have lower startup costs and are beginning to attract more money. He recommended IT firms specializing in the clean tech or life sciences industries.

But the speakers said there were still large pots of money available for companies in the latter stages of development.

David Kabakoff, executive partner of Sofinova Ventures in La Jolla, told of a recent deal where an "angel" investor contributed $10 million of the $30 million raised for a late-stage company.

Jason Mendelson, managing director of Colorado's Foundry Group, suggested that the investor wasn't actually an angel. "That's what we call a 'god,'" he joked.

The speakers suggested that promising areas for VC investment in the near future include:

Biotech: Last year, 54 percent of VC funds for San Diego companies were invested in biotech firms, including $88 million for Aragon Pharmaceuticals and $34 million for Genomatica.

Kabakoff said biotech firms are benefiting from a slightly more permissive attitude at the Food and Drug Administration, which sharply increased the number of drug approvals last year.

"People continue to wring their hands about regulatory uncertainty, but there are growing signs that breakthrough products can get to market in a much shorter time than before," Kabakoff said.

Even so, he said, regulation still represents the second-biggest chunk of biotech expenses after research and development, so he concentrates on companies that are either proceeding down a well-trodden regulatory path or that are pioneering fields so new that the FDA relies on them to help chart the route toward approval, such as "orphan" drugs that can treat rare diseases.

Even though such drugs often have a small market, he said, the science used in creating them can lead to greater discoveries later.

Clean tech: Green energy and conservation firms attracted 17 percent of VC funding in San Diego last year, led by Sapphire Energy, which got $135 million in funds for its algae-based fuel, and SmartDrive Systems, which received $55 million for its computerized systems aimed at helping vehicle fleets cut their fuel use.

Mendelson suggested that in the next decade there would be some "tremendous success stories" in clean tech. But in the meantime, the field has been dogged by political criticism over government support for the bankrupt Solyndra solar panel-maker or the money-losing Tesla electric car maker.

Mendelson thinks much of the criticism is unfair, particularly involving Tesla, which "has a phenomenal product" that could eventually change the auto industry. But he said there has been such political downdraft that he feels like "a voice crying in the wilderness" when he touts clean tech.

"We're in the froth of disillusionment," he said. "But 10 years from now, we'll look back and see that some real game-changers were formed around this time."

In the meantime, Mendelson is investing in IT companies in the energy field, such as a software firm that has developed a computerized system to help large companies cut their electricity use and feed it back into the power grid.

Do-it-yourself tech: Mendelson said he feels one of the most promising areas is for individually managed manufacturing, which will allow individuals to design and produce their own products. He noted that there are already "3-D printers" that can churn out plastic cards and other items. He predicted that in the near future those printers would be able to work with metal and glass.

Mendelson said many people might view such technology as being too risky, adding that a more conservative business partner might look at the idea and say, "No. That's stupid."

Then again, people might have said the same thing about Mendelson's investment in Zynga (Nasdaq: ZNGA), an online gaming company that now has $1.3 billion in cash, with a stock price five times higher than Mendelson's buy-in.

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