Report Shows San Diego’s Innovation Economy Strengthening, Except in Venture Capital

7/19/11Follow @bvbigelow

Private research organizations employ almost 31,000 people in San Diego County, more than the number of similar employees in any other California county, according to a new quarterly innovation report from Connect, the local non-profit group for technology and entrepreneurship.

Researchers teased that statistic from U.S. Department of Labor data for the third quarter of 2010, the most recent quarter available, according to Steve Hoey, a project leader at Connect who called the new finding “a testament to the strong R&D base we have in our region.” The report ranked Silicon Valley’s Santa Clara County second, with almost 19,000 working at private research institutions. Los Angeles was third with more than 17,000.

Such findings in the report underscore how San Diego has become a hotbed for early stage technology and life sciences companies, despite a decline in the amount of venture capital invested here.

Entrepreneurs started 70 companies in San Diego during the first three months of this year— double the 35 startups formed during the same quarter of 2010, according to Connect’s First Quarter 2011 Innovation Report. The report also shows an uptick in tech sector employment, continuing strength in federal research funding, a sharp increase in patents issued to local inventors, and increasing mergers & acquisition activity. Venture capital investments in San Diego startups, however, continue to decline.

Here’s a breakdown of the report’s major indices:

—The 70 new startups founded in San Diego accounted for nearly 12 percent of the 597 technology and life sciences companies created throughout California during the first quarter. San Diego’s tech startups created more than 130 new jobs, nearly 8 percent of the 1,700 new jobs created by new startups statewide. Twenty-seven of San Diego’s new companies are developing software, an increase that was offset in the life sciences where only 11 new companies were formed. Another 17 were communications startups, with the rest focused on recreational goods, defense, computer, and environmental sectors.

—Communications equipment manufacturing, as usual, represented the largest employment sector of the local innovation economy, with almost 28,000 jobs. San Diego’s life sciences sector and software each accounted for 27,400 jobs, and defense and transportation companies represented almost 25,000 jobs.

—Venture capital investments, which are the lifeblood for new companies, amounted to just $100 million in 22 San Diego companies during the quarter, according to the report. That compares with $226 million for 31 startups during the same quarter last year. The trend is clear even using a moving average to smooth quarter-to-quarter fluctuations, with San Diego venture funding during the first quarter of 2011 down almost 60 percent from the fourth quarter of 2007. The report notes that the decrease in VC funding was substantially larger than in other key innovation clusters, such as Silicon Valley and the Boston region.

—The three largest investments during the quarter accounted for 64 percent of total VC funding in the region: Conatus Pharmaceuticals with $25.3 million; Genomatica, with $23.8 million; and EcoATM with $14.4 million.

—Federal funding through research grants to San Diego institutions, universities, and innovation companies totaled $300 million in the first quarter, with $257.8 (86 percent) coming from the National Institutes of Health. While that was down from a recent peak of $383.3 million that San Diego researchers received in the second quarter of 2010, the report says it was the highest first quarter award in the past three years.

— Company merger and acquisition deals in San Diego during the quarter totaled $2.3 billion, nearly triple the $845 million in M&A deals reported during the first quarter of 2010 and up almost 40 percent over the nearly $1.7 billion in deals reported the previous quarter. Deals in which San Diego companies were the buyers of other firms totaled nearly $1.4 billion.

—In San Diego, 1,115 patents were granted in the first quarter of 2011, a 19 percent increase over the 940 granted in the previous quarter. Patent applications published during the quarter also were up, with 1,541 patents published. While Santa Clara led the state in terms of overall patent activity, San Diego accounted for 17 percent of patent applications published in California and 12 percent of the patents granted.

San Diego’s tight venture market has intensified Connect’s efforts to raise additional sources of startup capital. Connect says it has officially endorsed a bill introduced by San Diego Republican Rep. Brian Bilbray that would encourage U.S. companies to invest their foreign assets in U.S. startups. The bill would reduce the corporate tax rate for such assets from 35 percent to zero if the repatriated funds are directed to R&D, proof-of-concept centers, early stage venture capital investment or manufacturing start-up costs, including contract manufacturing.

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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