Solving San Diego’s Venture Capital Crisis is Mission for New Task Force of Tech Leaders

10/21/09Follow @bvbigelow

The evaporation of much of San Diego’s hometown venture capital base has prompted the city’s technology community to organize a business task force to find new ways of getting startup capital to early stage companies.

Creating the task force is part of a broad initiative that Connect, a local non-profit organization for technology and entrepreneurship, has undertaken to boost support for San Diego’s innovation economy—as well as its political clout in Washington D.C. Connect CEO Duane Roth, who outlined the initiative in August, says Connect chairman and local biotech legend David Hale spearheaded the formation of the task force, and recruited David Titus of Windward Ventures, a San Diego VC firm, to lead the effort.

Roth says Titus has recruited task force members from San Diego’s technology industry associations “to try to get our convergence act together.” The list includes representatives from Biocom, CommNexus, Cleantech San Diego, the San Diego Venture Group, San Diego Software Industry Council, and the San Diego Regional Economic Development Corporation.

Altogether, about 15 people are on the task force, “including people who are just interested in solving this problem,” says Titus. “The idea is to come up with a plan to increase the access to capital for the early stage companies here.”

Even before last year’s collapse on Wall Street, it had become clear that a number of San Diego’s most prominent hometown venture capital firms were dramatically scaling back their operations and were making no significant new investments. The list includes Enterprise Partners Venture Capital, Forward Ventures, and Titus’ firm, Windward Ventures.

Titus says Windward raised its last venture fund in 2000, and the firm made its last new investment from that fund in 2007. Since then, Titus says, “We’re managing our [existing] portfolio of companies—like many others.” And for at least the past two years, Windward has been unable to raise a new fund from pension funds, college endowments, and other institutional investors. As Titus put it, “The meltdown in the public equity markets and the global economy has really shut that door tight.”

The situation, which was only compounded by the credit crisis that began last year, has created a void in funding for San Diego’s early stage startups that was not immediately apparent—largely because out-of-town venture firms continued to invest heavily in many of San Diego’s mid- to later-stage startup companies. With venture capital continuing to flow into the region, some San Diego business leaders questioned whether there was really a dearth of venture capital in San Diego, or even much need for San Diego-based VCs. Their argument, basically, is “if you build it, they will come.” That is, if San Diego’s early stage startups have truly innovative technology, then venture capital will come from far and wide to invest in it.

Titus doesn’t see it that way. “I can only speak personally,” he says, “but when you’re talking about early stage companies, they don’t get done by out-of-town venture capital firms. They just don’t.”

Titus says venture firms want to keep especially close watch on the early stage companies in their portfolio. As a result, he says San Diego entrepreneurs who are seeking Series A venture funding are frequently told by Northern California venture firms that if they want to get funded, “the answer is to move to the Bay Area.”

That sentiment was seconded by Jeremy Glaser, a lawyer and partner in the San Diego office of Mintz Levin whose corporate practice focuses on emerging growth companies and the investors that fund them. Glaser says when he meets an early stage entrepreneur these days, “One of the first questions I get is: ‘Should I be doing this in San Diego or should I be up in the Bay Area?’”

Glaser, who is a member-at-large of the Titus task force, says venture capital for early stage companies is just too hard to find, and the general partners at venture firms simply don’t want to make long-distance investments—even when it’s just 453 miles between San Francisco and San Diego. “I don’t want to get too melodramatic,” Glaser says, “but getting this early stage venture capital is crucial to the tech community in San Diego.”

Glaser says he sees parallels between the goal of the Titus task force and the effort that San Diego’s business leaders mounted in the mid-1990s to recruit Robert Kibble from Paragon Venture Funds in Menlo Park, CA, which established Mission Ventures in San Diego in 1996. “We got community leaders who made a concerted effort to recruit and establish a VC firm in San Diego, and that’s how we got Mission Ventures,” Glaser says. “Some people wrote personal checks to make that happen…I believe we need to get the leaders of this community and who care about San Diego to put their money where their mouth is.”

To Titus, however, the problem of early stage capital is bigger than that.

“If all you did was add one venture firm, that’s still far from helping to jump-start the flow of venture capital in the local economy,” Titus says. “We’d really like to figure out a series of actions that can have a broader impact.”

Titus anticipates focusing San Diego’s task force on a variety of areas, including getting increased federal funding, encouraging investments by family investment groups and individual investors, and recruiting banks and other lenders to get more involved. “This is an effort by a broad section of the community to address this problem from multiple directions,” Titus says.

Peter Shaw, who joined the Titus task force from the San Diego Venture Group, where he is the current president, says he wants to ensure that the task force addresses the lack of capital available to the entrepreneurs who want to start early stage technology companies in San Diego. “Overall, having more money is good, but in terms of where this task force is headed, we want to see that more companies get that first Series A institutional round of funding,” Shaw says.

With just two meetings held so far, Titus says the task force is still focused on generating ideas for the group to pursue. “We’re still in the brainstorming phase of the project,” Titus says. “And if I can get a plug into your article, it would be to ask anyone who has an idea to send me an e-mail.” His e-mail is titus@windwardventures.com

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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  • http://sdbn.org Mary Canady

    Great article and initiative to bring more early-stage funding to San Diego Biotech. I have two questions:

    1. Will there be a representative for the San Diego biotechnology professionals/scientists in the task force? At the San Diego Biotechnology Network events, we meet many scientists who are having a very difficult time finding jobs, for example in drug discovery R&D. If the direction San Diego Biotech takes (e.g. into Clean Tech) does not match their talents, then training, etc. efforts should be undertaken to retain them in the region, as they are one of our most important assets. Additionally, many of these scientists have fantastic ideas for growing biotech in the region.
    2. San Francisco’s financial center is mentioned, what about Los Angeles as a source? Opportunities for ‘fewer than 453 mile’ funding collaborations exist but in my opinion have not been cultivated as much as they could be. This may mean exploring more medical device startups in San Diego, considering Orange County/LA as a viable ‘extension’ to the San Diego region, or just bridging the two ‘cultures.’

    Mary Canady

  • Will Smith

    What makes this blue ribbon panel think they will have any insight on how to innovate a solution? What value have they created other than transient bumps for inside traders in their companies. What is being forgotten is that sustainable value is created by producing a product or service–not a VC prescribed M&A or exit through the stock market. San Diego has a very poor track record in producing products and the San Diego biotech business model looks more like a Ponzi scheme than an investment opportunity. The solution is to focus on technology that produces products, finance through bootstrapping, grants, loans, and corporate partnerships and to avoid the financial parasites that add nothing but money to the deal. The people qualified to structure the rescue plan should be those who can say they invented something or who built a company that still exists.

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