Where Failure is an Option: San Diego’s Startup Culture as a Bay Area Annex

11/25/09Follow @bvbigelow

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had worked hard, fought valiantly, and there were reasons outside of your control that caused the failure. If the company failed because of arrogance, stupidity or failure of integrity—that was certainly a different story—and you were screwed.”

Barrow, who is director of the Massachusetts Technology Transfer Center (as well as a Boston Xconomist) and who spent 11 years at Connect, the San Diego non-profit group for technology entrepreneurship, also suggests that San Diego’s startup culture is less intense.

“Boston startup culture is different—definitely entrepreneurial—but much more is done before the startup is launched,” she tells me in an e-mail. “It is almost as if San Diego startups are like the proverbial plane that is being built while flying—and Boston ones are fully designed and tested before taking off for the first test flight. In San Diego the whole team might not yet be assembled at launch—the founder probably operates as CEO for longer before bringing in a more experienced senior management team—while in Boston there is a strong emphasis to get everything together before going out to raise significant money.”

Torrey Pines State Beach

Torrey Pines State Beach

Jeb Spencer, the managing partner at TVC Capital, a private equity firm that specializes in software deals, seconded Barrow’s view about San Diego, writing in an e-mail that San Diego “just has too many distractions to keep people at work 24 hours… You often need to recruit more intense people from outside San Diego to be in senior management positions here (and then they get jaded after a few years, take up surfing and gliders or something).”

Spencer also offered a personal anecdote about the Bay Area’s tolerance of failure: “When we went out to raise our 2007 fund (our second), my partner and I were asked at the office of a respected institutional fund manager in the Bay Area about ‘our mortality rate’ in the first fund. We both looked at each other perplexed, asked for clarification, (“how many of your companies have failed?”) and then we both responded at the same time—’none.’”

TVC’s investment strategy targets mature companies with later-stage growth potential. Still, he says it became clear that in the Bay Area, VCs are making their investments based on “portfolio theory” and actually expect 40 percent or so to fail. So failure is no big deal to them. “Because Silicon Valley leads the world in startups, and has for more than a decade, and because at least 40 percent of funded startups fail and 95 percent of startups overall fail, you get used to failure in the Bay Area.”

So do San Diego’s investors have different expectations?

Leo Spiegel, a managing partner of San Diego-based Mission Ventures, says he agrees that the challenges of getting a startup to work are enormous, and failure can provide valuable lessons and experience. “On the other hand,” Spiegel tells me, “I do believe … Next Page »

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://www.sandiegobusiness.org Julie Meier Wright

    Those that seek to emulate San Diego are focused on our incomparable research base — a diverse and densely concentrated powerhouse of knowledge. We do a good job of moving research into the private sector and potential commercialization. Mike Krenn does a great job of summarizing San Diego’s challenges. Some of our local organizations such as Biocom are doing a great job addressing the issue of capital. We also have our first real incubator, EvoNexus, thanks to Rory Moore at CommNexus. But at the end of the day it’s about accessing money to take a great idea to commercial success. And continuing to create awareness and “buzz” about San Diego as an innovation economy.

  • http://www.xconomy.com/author/bbigelow/ Bruce V. Bigelow

    All valid observations Julie, and thanks. It seems to me that building and maintaining a critical mass in various tech sectors is a key factor in sustaining a startup culture. It’s clear that San Diego has successfully maintained its critical mass in biotech. On the other hand, the bench doesn’t seem to be as deep as it once was in the networking technology sector and perhaps in Internet/web-based technologies. And then there’s the local VC issue.

  • http://www.none.com JB

    I don’t think you can separate the VC ‘xconomy’ out of the actual, real economy. They are related.

    San Diego (and California in general) economy is declining rapidly and profoundly. For example the research apparatus mentioned above as a competitive advantage, must be in jeopardy currently with the state gutting and permanently cutting higher education.

  • http://www.xconomy.com/author/bbigelow/ Bruce V. Bigelow

    Northern California is simply far more robust when it comes to moving promising R&D to commercial applications. Silicon Valley has by far the biggest concentration of venture capital, and the most VC investments quarter after quarter. I agree that the UC funding crisis poses a huge threat to the innovation economy—but I don’t think that threat has materialized yet (perhaps because UC San Diego, for example, has borrowed heavily to keep the wolf at bay).

  • http://www.daggerboardadvisors.com Dennis Clerke

    In the past two years at DaggerBoard Advisors(an advisory firm for emerging software companies), we have seen a real change in the So. CA technology landscape. San Diego’s software community has become much more concentrated at the early stage. Many of which are funded by friends & family and are still finalizing the fundamental business model. Connect, EvoNexus and others play a valuable role in helping companies at this stage.

    However after the early stage, there is a gap with limited local venture capital, few alliances and sparse talent. Inevitably, once the business model is defined and the firm starts to emerge, the companies spend a lot of time in Silicon Valley getting Venture funding, establishing technology alliances and recruiting teams. Many get acquired at a young age or establish affiliate offices in the Bay Area and the San Diego founding location becomes a satellite.

    The good news is that San Diego has a solid foundation of early stage resources and entrepreneurial activity, but the bad news is that it’s a short runway without a lot of flights to San Jose…