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

11/25/09Follow @bvbigelow

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that in life there are winners and losers, and in the end we need to back the winners… That is why I always suggest to entrepreneurs and startup executives to choose their next gig wisely.”

Among San Diego’s life sciences VCs, Forward Ventures’ Ivor Royston (a San Diego Xconomist) tells me: “You always have to evaluate ‘what was the reason for the failure?’ Oftentimes, [biotech founders] are much more valuable having been through that… For repeated failures, yes, it is a problem. But certainly a single failure is not an issue, unless it is attributable to the individual.”

Drew Senyei of Enterprise Partners Venture Capital (who also is a San Diego Xcnomist) sounded a similar theme, saying, “It does not matter where you are—Seattle or San Diego or San Antonio—if you have a failure the money source (which is often from San Francisco) looks at the merit of the current idea and the reason for the past failure.” For example, Senyei says, “If it was a drug that failed in Phase 2, that is not the fault of the CEO, it is just Mother Nature winning that hand. I have not had a series A startup that has not gone to a series B— after that is another story!”

Among San Diego’s startup CEOs who have experienced both success (iPivot) and failure (AirFiber), Brett Helm writes in an e-mail, “Most people fail because they follow a business plan—because most inexperienced entrepreneurs think that’s what the investors want them to do. WRONG. Investors want to make money so you have to adapt. It doesn’t matter what you do as long as you create value so they (investors) make money.” Helm adds that the No. 1 rule for startup CEOs is to never lose your credibility. “If you maintain your credibility,” Helm says, “a business failure can be overcome.”

Still, “it is much easier to get a startup company off the ground in Silicon Valley than it is in a town like San Diego or Seattle,” says Mike Krenn, managing director of the DLA Piper law firm’s venture pipeline. Krenn says the bar to get venture funding is simply much higher in San Diego for a number of reasons.

“One, there are literally hundreds and hundreds of sources of capital” in Silicon Valley, according to Krenn. “On the IT side, we have less than five (and that’s being liberal) sources of venture capital with physical offices in San Diego. In Silicon Valley, you have over 300 funds. There are just a lot more doors you can possibly wedge open.

“Two,” Krenn says, “It is simply easier for a fund to investigate a company in its own back yard, than it is to travel back and forth on Southwest to look at a San Diego investment.

“Three, should you actually invest in a target company, it is easier to watch over your investment, and meet with the management team regularly, if you’re a car drive away, rather than a San Diego flight away.

“Four,” Krenn says, “there are just so many more opportunities to open up customer and partner relationships,” given the number of large companies that are based in Silicon Valley and that are accustomed to working with startups. Krenn concludes, “It is easier for startups to gain market traction if they are physically located in Silicon Valley.”

Of course, those also sound like four good reasons to address the scarcity of hometown venture capital firms in San Diego.


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…