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

11/25/09Follow @bvbigelow

Not long ago, one of my Xconomy colleagues in Seattle posted a provocative piece about startup failures and suggested the startup culture in some cities—especially the San Francisco Bay Area—is far more tolerant of technology entrepreneurs who fail.

Greg found that many Seattle entrepreneurs say they feel stigmatized by startup failures in the Pacific Northwest (does all that winter drizzle make them more pessimistic?). Seattle VCs, on the other hand, take a milder view. In Boston, the startup culture apparently has an attitude, at least the way it’s described by Brad Feld, who has been investing nationally for the past 15 years (and who co-founded the TechStars seed-stage startup program and the Foundry Group in Boulder, CO). Feld says, “One of the reasons I think Boston has resurged as such an entrepreneurial community, in a good way, in the last couple of years, is it had a massive chip on its shoulder.”

In the Bay Area, the kingdom of heaven for venture capital, Greg heard (at least from outside) that failure is considered a badge of honor—which makes it sound like collecting an Eagle Scout badge for entrepreneurs.

San Diego’s startup culture, however, was largely unrepresented that day. So I conducted an informal survey of local VCs and entrepreneurs and discovered to my surprise that many view San Diego as a kind of venture annex of the Bay Area—especially as San Diego’s hometown venture firms have faded in recent years.

“I think San Diego is more like the Bay Area than Seattle,” says Jeanine Jacobson,” a San Diego-based partner of the Founder Institute’s startup incubator and mentoring program. “There is a quote that everyone can relate to: ‘Good judgment comes from experience, but experience comes from bad judgment’ and entrepreneurs are no exception to this rule. All one has to ask VCs is who would you rather invest in—a first time entrepreneur or an entrepreneur who has had a past failure?”

Marco Thompson, who founded Wind River Services (which was acquired earlier this year by Intel) and is managing director of San Diego-based Express Ventures, was among several who linked San Diego’s startup culture to the Bay Area. “Financing for San Diego technology companies comes principally from the Bay Area, and not at all from Seattle,” Thompson says. “So we are clearly infected with Bay Area attitudes, and are very tolerant of previous failures.” Thompson adds, “My attitude, and the attitude of many investors that I know, is that ‘an entrepreneur learns more in a failure than in a success.’”

Abi Barrow, who has years of experience with startup programs in both San Diego and Boston, says, “While I am not sure that failure was a badge of honor in San Diego, it was certainly accepted and not held against you if you 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 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…