At a Private Xconomy Dinner, Luminaries Debate the Future of Innovation in San Diego

12/22/10

The importance of diversifying the local economy became obvious in San Diego during the 1980s, as the ebb in defense spending exposed the area’s collective dependence on Atlas rockets and cruise missiles, along with the payroll for the Navy’s Pacific Fleet. But the path forward also was obvious—especially after Ely Lilly acquired San Diego’s Hybritech for $480 million in 1986. San Diego’s biotech cluster was born in a confluence of opportunity and necessity.

Since then, San Diego has prided itself on its innovations in life sciences, wireless communications, and other technology clusters. But these days, there is a pervasive sense that San Diego’s innovation economy is flagging—and might even be faltering. The hometown venture capital firms that helped fuel this area’s extraordinary expansion during the booming 1990s have largely evaporated—and this time the path forward is far from obvious.

So Xconomy asked some of San Diego’s best business minds to participate in an “on the record” dinner discussion on December 8, as a way to generate ideas for boosting San Diego’s innovation economy.

In attendance at the dinner—which was hosted by National University and sponsored by Ernst & Young, Latham & Watkins, and Silicon Valley Bank—were Linden Blue, vice-chairman at General Atomics; Hui Cai, vice president of business development at WuXi AppTec; C.J. Warner, chief operating officer at Sapphire Energy; Erik Bruvold, president of the National University System Institute for Policy Research; Miles Kirby, a senior director of business development at Qualcomm; Andy Pelletier of Silicon Valley Bank; Hiep Pham, CEO of TipCity; Bill Rastetter, a partner at venture firm Venrock; Faye Russell of Latham & Watkins; David Titus of Windward Ventures and the San Diego Regional Economic Development Corp.; Jim Waring, board chairman at Cleantech San Diego; Claudio Arriola, regional president of Canieti Noroeste in Tijuana, Mexico; Doug Regnier, partner at Ernst & Young; Katy Frankel, tax partner at Ernst & Young; and Bob Watkins of R.J. Watkins & Co. Executive Recruiting Consultants (and the San Diego Regional Economic Development Corporation). Xconomy publisher Steve Woit, business development associate Michele Gerus, San Diego editor Bruce V. Bigelow, and San Francisco editor Wade Roush also attended. Our conversation circled several areas of concern:

—Access to capital remains the single biggest issue for seed-stage startups in San Diego. Venture funding is down 67 percent from its peak of $541 million in the first quarter of 2009, descending to $173 million in the third quarter of 2010, according to Bruvold. Innovators and entrepreneurs continue to launch promising startups, but they are wanting for venture capital.

—Hand in hand with the decline in local venture investing has been the shrinking size of the area’s indigenous venture industry. In 1996, according to Titus, there were three general partners with investing authority residing in San Diego. “Then we had this huge explosion so that by 2001, there were roughly 30 general partners who lived and worked in San Diego who had the ability to write checks, so you had this explosion of deals,” said Titus. “That has shrunk back now to where, arguably, there are maybe 10 partners resident in San Diego who can write checks.”

—In Titus’s view, the shortage of local venture partners in San Diego “has a huge impact on how many companies get funded.” But Venrock’s Rastetter disagreed, arguing … Next Page »

Bruce Bigelow is San Diego Editor of Xconomy. Wade Roush is Chief Correspondent and San Francisco Editor. Follow @

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  • June

    Maybe its time San Diego grows up and starts playing in the big game. The build and sell, begging for money cycle is no longer functioning effectively. Time for a more sustainable company economy, so talent does start to feel good about coming to and staying in San Diego. Otherwise, what’s the point of moving to a region, buying an expensive home etc., losing your job and having to leave because there’s no great senior level roles to replace it?

  • http://www.ascertain-ment.com Lou Volpano

    I live and operate in OC and come to SD frequently to explore, and network. Start up capitals never a problem, but the start up attitude is. With all the academics, and ‘institutes’ ready to pontificate, are there any that produce productivity? Coming up with a great idea can be done by a high school drop out. In short – “TALENT” is organic, not manufactured…. and most have not learned – in their hallowed MBA programs – how to even WORK in company, much less form one.

  • http://www.techcoastangels.com Steve Flaim

    Regarding the comment about individual angel investors, I think the critical issue is how many deals are actually done by angels in Southern California, not how many deals an individual angel actually invests in. Tech Coast Angels, located in Southern California, is the largest organized angel investor group in the country. We started operations in 1997 and are now nearly 300 members strong organized into 5 networks (Orange County, Las Angeles, Westlake/Santa Barbara, Inland Empire, and San Diego). We have funded over 150 startup companies with over $150M of our own funds. These companies have gone on to raise over $1B in follow-on funding. We believe that we have made a significant difference in Southern California and it is the aggregate effect that counts rather than any one individual’s investment performance.

  • Cliff

    Great comments and I think talent is one of the biggest issues at hand. Funding aside, the team needs to be able to execute and finding a proven team is now (IMHO) the biggest challenge in SD. The ambitious and passionate leave for greener pastures where they team up with thought leaders.