San Diego Chalks Up $198M in Venture Capital, But Where Have All the Software Deals Gone?

7/21/11Follow @bvbigelow

[Corrected 7/21/11, 2:45 am. See below.] The single largest technology sector in San Diego today is software. According to the Connect First Quarter 2011 Innovation Report, San Diego’s software industry accounted for 35 percent of the region’s 5,900 private technology companies, while the combined number of private biotech and medical device companies accounted for just 10 percent.

San Diego’s software industry also has the biggest workforce of any local technology sector, growing in recent months to 28,300 and edging out the 28,000 working in the life sciences, according to the Connect Report. Software-focused startups also accounted for 27 of the 70 newly formed companies that Connect counted during the first quarter.

So why do venture capital investments in San Diego’s software sector barely register a heartbeat?

A regional breakdown of venture activity in San Diego from the MoneyTree Report shows that 29 startups received a total of $198.2 million during the second quarter that ended June 30. All but five of those deals were categorized as life science deals, and accounted for at least $193.1 million of the capital invested—or more than 97 percent of San Diego’s second-quarter total.

And not all five of the remaining deals are totally software focused.

The five appear to be Web-based companies, rather than software startups, and together account for at most $5 million of the $198.2 million—or less than 3 percent of San Diego’s total venture investment. The five are Kidzui, Desmos, Crescent House Publishing, Verve Wireless, and The Backplane. (Could The Backplane be the new celebrity social media network backed by Lady Gaga? In San Diego?)

So what’s happening? If software is such a big technology sector in San Diego, why aren’t we seeing more software venture deals?

[Corrected 7/21/11, 2:45 am. Dave Titus tells me his stint as managing director of strategic initiatives at the San Diego Regional Economic Development Corp. ended earlier this month.] It’s a combination of things, according to David Titus, a former VC partner who now serves as president of the San Diego Venture Group.

One reason is simply that life sciences funding is so dominant in San Diego, Titus says. The region usually places among the nation’s top three innovation clusters, and we have high concentrations of biotech and medical device companies. A related factor is that it typically requires far more capital to get a life sciences startup through clinical trials and regulatory approval, so the funds invested in software startups pale by comparison.

Indeed, the cost of starting a new Web or IT company has dropped dramatically, Titus says. “So a number of new companies are off the radar. A bunch of them are companies that had raised $500,000 or $750,000 from friends and family.” What Titus left unsaid is that some of these IT startups are simply not interested in raising capital from venture investors. They can bootstrap their business and keep a bigger share in their own companies for themselves.

Finally, if software employees constitute the biggest share of San Diego’s technology workforce, Titus says it likely means they’re working for the bigger software companies with San Diego operations, such as Intuit, ESET, and Fair Isaac, rather than at startups. There are also loads of software jobs in San Diego at companies like Qualcomm and SAIC.

Another factor, of course, is one I’ve noted many times. The amount of venture capital invested in San Diego has plunged dramatically in recent years.

The MoneyTree data says the $198.2 million invested in San Diego startups during the second quarter is a 24 percent increase in local invested capital, compared with an adjusted $159.2 million that VCs invested in San Diego during the first quarter. (The MoneyTree survey, prepared by the NVCA, PricewaterhouseCoopers, and Thomson Reuters, reported in April that VCs invested just over $100 million in 22 San Diego startups during the first quarter of 2011.)

In comparison to the same quarter last year, however, VC funding declined by 8.1 percent, from $215.7 million invested in 30 San Diego companies. And it’s a far cry from the $463.5 million that was invested in San Diego by venture firms in 2007.

So what are the 10 biggest venture deals for San Diego-area companies from the second quarter of 2011, based on data from MoneyTree? They are all life science companies—not that I’m saying that’s a bad thing. The companies and amount raised are:

—Sangart, $50.4 million

—Ambit Biosciences, $22 million

—CoDa Therapeutics, $19.2 million

—Otonomy, $14.2 million

—Access Scientific, $10 million

—Receptos, $8.3 million

—Verimatrix, $7.5 million

—Conatus Pharmaceuticals, $7.3 million

—Elcelyx Therapeutics, $6 million

—Fate Therapeutics, $5.5 million

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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