Working Our Way Out of San Diego’s Capital Formation Drought

1/25/10

As Xconomy has reported on many occasions, hometown venture capital firms have been receding from the startup scene in San Diego. This new reality might not seem apparent because the broader economic downturn has slowed activity across the board, and because some venture capital continues to flow into San Diego’s life sciences and technology companies from Northern California and elsewhere. But there are reasons why we need to address this issue.

I believe that we can work ourselves out of this capital formation mess. One example is the MarketLink program created by CommNexus, the local non-profit group representing San Diego’s telecom industry.

The idea for MarketLink originated during a CommNexus subcommittee on capital formation whose mission was to increase capital flow to local tech companies. About five years ago, San Diego was sorely aware that the OOTVCs (out-of-town-VCs) were notoriously slow at coming here to look at our great startups. Even then, there wasn’t enough local capital to do right by our new ventures here. Mike Krenn (DLA Piper) and I began thinking about giant companies as other sources of capital for our jewels. At the time most large corporations like Samsung, British Telecom, Qualcomm and many others had both venture arms and strategic investment groups that were looking for investments, partners and potential acquisitions.

At first we thought about running a San Diego based company showcase for multiple strategic investors to attend, similar to the kind of event Connect used to run in the old days for OOTVCs. But the attendance at these events for OOTVCs was waning significantly, and we feared a similar lack of attendance among strategic corporate investors. At that point the then-CommNexus CEO, Julia Wilson, came up with a brilliant idea. Rather than hold a general company showcase for multiple strategic companies, why not create a local showcase event that was tailored to a specific strategic investor. The strategic investor would tell CommNexus what types of companies and technologies they were seeking, and CommNexus would solicit applications from local technology companies, screen them, and work with the strategic investor to select the companies they would meet with when they came to town. I happened to be present when Julia vetted the idea with the Qualcomm venture people and they blossomed with excitement at the idea. The rest is history.

Since the first MarketLink program began in 2006 with France Telecom, CommNexus has held 13 MarketLink programs with such companies as LG, Nokia, Verizon Wireless, and Ericsson. Each MarketLink event typically draws more than 70 applicants, of which 16 are selected for discussions with the strategic investment team. Out of this program four local companies have received strategic investments and 31 percent have formed partnerships. It is a great example of one innovative approach to help overcome the capital formation problem in San Diego.

Martha Dennis is a principal at Gordian Knot, an advisory firm to emerging technology businesses in San Diego. She was previously a venture partner at San Diego's Windward Ventures. Before that, she was the CEO and co-founder of San Diego’s Waveware Communications, a co-founder and vice-president of engineering at Pacific Communication Sciences Inc. (PCSI), and assistant vice president of software engineering at Linkabit. Follow @

By posting a comment, you agree to our terms and conditions.

  • http://www.ai-one.com Tom Marsh

    Martha,

    Thank you for the push to work outside of the OOTVC problem and the MarketLink program. CONNECT is also working on the problem in a number of ways. Some additional thoughts:

    Does anyone ever ask the question of the true relevance of VC investment? I am as guilty as anyone of reading the reports of VC investment and certainly if you have spent much of your life chasing financing, it’s easy to look at the data hoping for signs of money coming available. I had just read the article about Entrepreneurship and our ability to start 700,000 new businesses every year, regardless of the economy, VC issues, stock market etc. I then read that VCs funded 2,500 deals in 2009, which is something less than 2,500 companies since many of those are second or later rounds.

    Now I know that VCs will point to the great companies they created and how important they are. Using the 2,500 number, they funded only 0.3% of the total companies started. I would bet some of the other 697,500 companies started last year will prove to be important, even though they weren’t anointed as chosen ones by the OOTVC elite. The cumulative effect of those entrepreneurs is millions of businesses in a decade, but since they don’t have a well organized PR department, their stories and their impact is lost. VC’s and the press marginalize them as mom and pop retail etc and that may be the bulk, but even the 5% of this group (14,000 companies) that are serious and important businesses dwarfs the numbers from the VC sector.

    The VC model as the primary driver of new business financing is inadequate and broken because the exits are broken. Until we get this fixed, the innovation is going to move to markets where the financing is as innovative as we used to be. At the Red Herring Conference last week where we won a Global 100 award, the panel of VCs and IBs droned on about the IPO bar at $100m revenue, 50% growth rate and %30 margins (so get ready to sell your company). Almost NONE of the 100 companies from all over the world in that room met those requirements. So does everyone give up? No, the table discussion with CEOs was all about going overseas to other capital markets. The metrics for the Shanghai exchange aren’t anywhere near $100m!

    Major point: it’s the other 695,000 (San Diego’s portion anyway) companies that need attention, public policy and financing. They are the “silent” evidence that’s missing from the dialogue. VCs are not relevant, except to themselves and their portfolio companies.

    Thanks for calling out the issue and alternatives.

    Tom

  • http://www.sdsic.org Bob Slapin

    The San Diego Software Industry Council produce an investment conference for nearly 10 years. The purpose of the event was to have selected companies present to local and OOTVCs. We abandoned the conference three years ago as it was no longer an efficient way to reach investors.

    Since that time we have found it more effective to work on an informal basis to match companies with investors.

    The requirements of investors are always changing. I continually hear that “good companies are getting funded.” However the definition of “good” is always changing. This is a challenge for companies seeking investment.

    However, a “good” company should understand the current OOTVC market and its requirements as well as it understands the market in which the company operates.

    The OOTVC requirements will, no doubt, be different from those of strategic investors. However, the same is true here. A “good” company should understand the current requirements of ANY investor as well as it understands the market in which the company operates.

    The San Diego Software Industry Council and other entities in San Diego attempt help companies understand the current requirements of particular investors.

    The drought will end but failure to understand the requirements of the investor is a waste of everyone’s time.

  • http://www.ai-one.com Tom Marsh

    Bob, Great points. I am hoping SDSIC, CONNECT, CommNexus, etc. could help drive some dialogue and media attention on the large number of companies that need funding. We agonize over unemployment numbers, not employment. Why not report the number of unfunded companies? They are not “bad”. We all know some “good” companies that have been unfunded or underfunded in spite of the support from your organization and others. Our economy here in San Diego depends on startups and early stage companies. We should at least track the data. Tom

  • BrettSF

    My partner and I are product managers for large internet companies (former software developers with years of experience) in the Bay Area. We have had a desire to start a business based on an idea that we have kept stealth mode for about 2 years now. We also have a desire to live in San Diego, where I have a lot of contacts from my engineering days.

    Concerns about the funding environment in SD have been on our minds and will ultimately play a significant factor in our decision about where to pull the trigger. I do not have the answer to the problem but programs like this play a part in the solution, or at least create a visible dialog and awareness.