For San Diego’s Hometown VCs, It’s Déjà vu All Over Again
Robert Kibble’s arrival in San Diego in 1996 was celebrated as a kind of watershed in some quarters of the region’s emerging information technology community.
While a couple of prominent biotech VCs already were established in San Diego by the early 1990s, some local software executives viewed the region as semi-arid when it came to venture firms that specialized in IT deals. And they viewed the 1995 IPO of Silicon Valley’s Netscape Communications as the starting gun in a race to join the Internet revolution. So local business leaders organized a delegation that persuaded Kibble to relocate to San Diego from Menlo Park, CA, where he had been a longtime partner at Paragon Venture Funds.
Now the combined effects of the recession and a contraction that was already underway among San Diego’s VCs when the recession started has prompted some talk that we’re back where we were in the early 1990s. Venture funds invested in in the region, at least in the first quarter of this year, fell to a low unseen since the mid-1990s—and IT deals were conspicuously lacking. Yet even in 2008, before the market plunge sent VCs into their bunkers nationwide, out-of-town VCs accounted for almost 90 percent of the deals and dollars invested in San Diego startups.
So it seemed only apropos to visit Kibble at Mission Ventures, the San Diego firm he co-founded with David Ryan 12 years ago, and get his take on whether San Diego’s tech community really needs locally based VCs. After all, recent data suggests that out-of-town VCs have long been providing most of the capital for San Diego’s startups.
Kibble says the committee that brought him to San Diego had 11 members, including software execs Charles Gaylord and Bob North. But John Denniston, who then headed the venture capital practice of the Brobeck, Phleger law firm’s San Diego office, was the key figure in the effort. “He’s the reason I’m here,” Kibble says. But Denniston is unlikely to reprise his role as recruiter, since he is now a partner in the Menlo Park, CA, office of Kleiner, Perkins, Caufield & Byers. And the Brobeck law firm no longer exists.
Still, Kibble believes it’s vital for San Diego to have locally based VCs. “It’s different when a company gets bigger and you’re doing Series B or C rounds,” he says. “But in early stage rounds, it’s just difficult to get on airplanes, and still have the contact base, and be there when you need to be.
“I find I can’t get the Bay Area firms I’ve co-invested with to come down,” Kibble adds. “It becomes a phone-call board meeting, and you lose something. There’s just a lot of heavy lifting with some of these deals, particularly on the other side, for example, when you want to change management. Then you have to coordinate with a lot of people—the lawyers, the recruitment guys. It’s more difficult.”
Kibble adds, “Without a doubt, the environment we’re in is unprecedented.” While part of that reflects the poor state of the economy generally, he says, the venture capital community is also undergoing an industry-wide reset of the business, “and the basic reason is that the returns have not been good.” With no IPO market, many venture funds have been unable to realize the increased valuation of healthy companies in their portfolios while continuing to support others. At the same time, the financial crisis and the plunge in financial markets have made college endowment funds and other institutional investors in VC funds “more circumspect about which asset class they put their money in.”
Last year, 214 venture capital funds throughout the country raised almost $28.3 billion from their institutional investors, according to the Virginia-based National Venture Capital Association. But Kibble expects VC fund-raising will only amount to about $15 billion this year. “In general, people think the industry should be smaller—as long as it’s not them,” Kibble says.
After moving to San Diego in 1996, Kibble and Ryan raised $63 million for Mission Ventures’ first fund and focused their VC investments primarily in early stage companies in IT infrastructure, communications, enterprise applications, and technology-driven services. (MVI showed “good” returns, Kibble says). The firm raised $225 million for its second fund, which, Kibble says, “like most 2000 funds is still underwater.”
Mission raised $210 million for its third fund, which closed in 2005, and is still considering investing in several more deals. It is among just seven San Diego-based venture firms that have raised a fund since 2005—a key indicator of firms that are still actively investing. “We’re still making new investments, but I must say the bar is pretty high,” Kibble says. “And I don’t want to get into any capital intensive investments because you don’t know how much in the way of reserves you need to have.”
Forming syndicates with out-of-town VCs also is harder, Kibble says, because “the Bay Area firms want to keep their powder dry for their own portfolio companies.” Which, by the way, sounds like another reason to encourage the formation of more San Diego-based venture firms.
A few leaders in San Diego’s innovation community seem to be tuning into the situation, including Peter Shaw, current president of the San Diego Venture Group, and lawyer Jeremy Glaser, whose practice at the Mintz Levin law firm focuses on emerging growth companies and the investors that fund them. But there’s been no apparent effort to organize a response, or even determine the dimensions of the ebb tide in San Diego’s VC community. So it’s still unclear if San Diego’s technology sector has absorbed the lessons learned 15 years ago or identified the key challenges to rebuilding its base of venture capital.