As Startup Considers IPO, Mission Ventures’ Leo Spiegel Sees End to San Diego’s VC Lockdown

9/2/09Follow @bvbigelow

Leo Spiegel says he’s sensing a change in San Diego’s listless venture capital sector.

Spiegel quickly adds that he doesn’t have the data to back it up. It’s just a feeling he has, a sailor’s instinct for a freshening breeze in the horse latitudes. Yet as a managing partner at San Diego’s Mission Ventures, Spiegel’s instincts count for something.

The San Diego venture capital firm, which specializes in early-stage software, IT, and technology-driven service companies, has seen firsthand the harsh effects the economic downturn has had on the region’s technology-based startups. During the first three months of 2009, there was a single $4 million investment in San Diego’s IT sector, according to Dow Jones VentureSource. In the second quarter, four IT startups in the region got a total of $50 million.

Leo Spiegel

Leo Spiegel

“My success in life has been due to the fact that I see the glass as half-full. You have to feel optimistic in this business,” Spiegel tells me. Yet in the economic collapse that began last year, he adds, “I was being challenged to see that, and to feel that. But over the past month or so, it just feels different. I’m cautiously optimistic.”

While Mission Venture’s offices overlook the El Camino Real, the famed “royal road” linking California’s Spanish missions, Spiegel’s view has been shaped chiefly by his experience as a CEO and entrepreneur. Before joining Mission Ventures in early 2001, he was president of Digital Island, a San Francisco-based Web hosting service provider with 1,100 employees. Before that, Spiegel was the CEO of Sandpiper Networks, a Thousand Oaks, CA-based provider of Internet hosting, content delivery, and network services that was acquired by Digital Island in a 1999 stock deal valued at more than $1 billion. (The British telecommunications company Cable & Wireless, in turn, acquired Digital Island for just $340 million in mid-2001.)

When I talked with Spiegel’s partner Robert Kibble a few months ago, San Diego VCs didn’t have much to be optimistic about. But Spiegel attributes some of his newfound optimism to the stock market’s rebound, as well as the federal government’s economic stimulus package.

“If you think about what the government has done, in terms of pumping ginormous amounts of money into the economy, it seems to be working,” Spiegel tells me. “You’re starting to see some new deals get done. You’re definitely seeing follow-on rounds.”

He also cites a few other recent encouraging developments:

—Without providing many details, Spiegel says one of Mission Venture’s portfolio companies has been interviewing investment banking firms in anticipation of selling its stock through an initial public offering.

—Spiegel says Mission Venture’s limited partners seem to be feeling better. Limited partners, which are the pension funds, university endowments, and other institutional investors who provide VCs with their investment capital, have had to re-examine their investments and relationships with VC firms, but they seem heartened by the rising stock market.

—Mission Ventures had to increase its reserves for Mission Ventures III, a $210 million investment pool that closed in 2005. “Things are taking longer, so we have to hold onto our companies longer. Some of our syndicate partners are not participating in follow-up rounds,” Spiegel says. “We’re very fortunate that we have plenty of reserves in our third fund, and we’re still making investments out of that fund.”

—The time is now for venture investors to begin considering investments in the moribund semiconductor sector. Mission Ventures was not an investor in San Diego’s Sequoia Communications, a fabless semiconductor design company that ceased operations in July. But Spiegel says it is crucial for VCs to continue to place bets on big [system-on-a-chip] deals, even though such startups now often require 6 to 8 years and $75 million in VC funding to come to fruition. “The big challenge with those [startups] is that you have to fund them to go public,” Spiegel says, “It may take another couple of quarters for VCs to get the courage.”

Bruce V. Bigelow is the editor of Xconomy San Diego. You can e-mail him at bbigelow@xconomy.com or call (619) 669-8788 Follow @bvbigelow

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