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2014 VC market looks rosy to investors

Good news for anyone with a stake in the venture capital community: 2014 is looking up both in San Diego and on a national level, for a couple of reasons.

“First, a lot of the members that I’m talking to in the [National Venture Capital Association] have a much rosier prediction for 2014 when it comes to fundraising,” said Bobby Franklin, president and CEO of the NVCA and a speaker at the San Diego Venture Group’s VC Outlook 2014 held Thursday at the San Diego Marriott Del Mar.

“They think it will be a bit easier. I’ve had a couple go on record with the press and expect it to be upward of the $20 billion range, as opposed to the $16 billion we saw this year. And the second, and perhaps more important, is the improvement in the exit environment.”

This increase in national fundraising is particularly important given the relationship between funds raised and funds invested over the past six years. Nationally in 2013, a total of 186 firms raised slightly more than $16 billion, but the investment watermark stands at $29 billion. Franklin said this discrepancy isn’t exactly a good one, but shouldn’t be cause for too much concern as fundraising is a lagging, as opposed to leading, indicator.

David Titus, president of SDVG, said 2013 was a fairly average year for San Diego in terms of dollars invested, but a glance at a capital inflow chart would make you think otherwise.

“If you look at the amount of venture capital flowing into San Diego during this past year, your first reaction is that it’s down, and by objective measures it obviously is,” Titus said.

“However, you have to realize that our numbers are highly driven by the biotech industry, and they had a great year last year. We had eight biotech IPOs here in San Diego, which meant that those companies were not out getting large, late-stage rounds. If you add the type of capital that they might have otherwise raised, like they did last year, you see that in fact the funding levels here are relatively steady.”

The local totals, Franklin said, put San Diego at $757 million invested through 97 deals, compared with $1.1 billion invested in 2012 through 105 deals. Of that 2013 investment, 51 percent went to the region’s powerhouse biotech industry, 17 percent to medical device and equipment companies, and 12 percent to software companies.

On the exit side of things, Titus and Franklin agreed that the IPO environment will remain attractive in 2014, although maybe not quite as hot as 2013, which saw the most life science IPOs since 2000.

Mergers and acquisitions were down a bit in 2013, but Franklin said that might pick up, depending on how the IPO scene plays out in 2014.

“Looking at [mergers and acquisitions], certainly they’re down in terms of numbers,” Franklin said. “It might be logical that they’re down given that the IPO market improved. We hear anecdotally that a lot of companies are on the sidelines waiting to decide what to do — maybe they have a suitor and are talking to them, but see the IPO market, which starts to give them pause and they start to rethink their options.”

An interesting local development to keep an eye on this year, Titus said, is an increasing number of venture firms and a broadening definition of what it means to be venture-backed. New VC firms such as CWC, Bootstrap, sweet100, Gastronome Ventures and Accelerate-IT have started popping up and offer financing to interesting sectors such as hospitality and food and beverage.

Nationally, Google Capitals’ Scott Tierney and Frazier Healthcare’s venture partner Carol Gallagher had a few predictions on the state of venture affairs in 2014.

Tierney said he predicts "unprecedented fundraising" in the first six months of the year, and said public valuations will remain attractive, although many companies may choose to stay private longer.

For her part, Gallagher seconded the prediction of a continued robust IPO market, particularly for life science companies, but said she wouldn’t expect quite the number of exits that 2013 saw.

She also said she predicts the next year or two will bring a reversion back to U.S. or North American commercialization, as opposed to handing things off to the major, globalized players.

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