Jason Mendelson, the Elvis of Innovation, Offers Some Lessons for San Diego’s Tech Sector
I like you. Just maybe you’ve got a clue
Meet my partners on a Monday,
We’ll see if they can dig you too
‘Cuz I’m a VC, I’m a VC
I drive around a Prius and meet over sushi
I’m a VC. Uh-huh. Who are you?
It takes more than PowerPoint slides to impress me
I’m a VC. Uh-huh. Who are you?
Jason Mendelson is the lead vocalist in the music video spoof, “I’m a VC,” which hit the top of the VC industry music chart on Sept. 6. He also is a founding partner of the Foundry Group, the Boulder, CO, venture firm.
In addition to light musical parody, Mendelson and his fellow vocalists and Foundry partners—Brad Feld, Ryan McIntyre, and Seth Levine—share decades of experience in venture investing and in the software industry. So it was only logical for the co-founders to invest primarily in early-stage Internet and software companies when the Foundry Group sprang onto the venture scene in 2007 with a $225 million fund.
Since then, Foundry has raised another $225 million fund, and the firm has acquired a kind of au courant aura, maybe from the success of Foundry’s investments in Zynga and Cheezburger, or perhaps because of Foundry’s close ties with TechStars, the accelerator program that now provides seed funding and business mentoring for Web and software companies in four cities.
With all this swirling in my head—music video, Zynga, TechStars—I felt like I’d gained an audience with the Elvis of innovation when Jeb Spencer of San Diego-based TVC Capital arranged a conference call with Mendelson. Our idea was to talk with him about San Diego’s splintered software community—and to hear whether the lessons from Boulder could be applied at sea level to re-energize the tech startup culture here.
I’ve been brooding about this topic for some time, and I’ve talked about it with a number of local innovation leaders. One refrain I’ve heard several times is that San Diego needs someone like Foundry’s Feld or Mendelson, or something like TechStars, to kick-start the startup culture here. I asked Spencer for his thoughts when the subject came up at a Padres-Giants game just after Labor Day. He founded TVC Capital as a boutique private equity fund that specializes in software investments, and he’s familiar with the local tech sector.
As I’ve previously reported, San Diego’s software industry accounts for the biggest workforce of any local technology sector, and more than a third of San Diego’s 5,900 private technology companies develop software.
Yet there is no center to San Diego’s software industry. We have a lot of companies in this region that are doing analytics and data mining—big data-crunching jobs for big customers. There are thousands of programmers developing embedded software systems for San Diego-based Qualcomm (NASDAQ: QCOM) and other hardware makers. And a lot of software engineers here work for Intuit (NASDAQ: INTU), and for dozens of government contractors like SAIC (NYSE: SAI), providing specialized IT services for intelligence and defense agencies like SPAWAR, the U.S. Navy’s Space and Naval Warfare Systems Command.
But software in San Diego is a scattered and disassociated industry. There is no critical mass, no synergy. For the software community, there is no here here.
As Spencer pointed out, the evaporation of San Diego’s rainmakers has only worsened the situation. With the exception of Avalon Ventures (also a Zynga investor), which raised $200 million for its ninth fund earlier this year, San Diego’s homegrown venture funds, including Enterprise Partners Venture Capital, Mission Ventures, and Shepherd Ventures, have largely depleted their tech funds.
Spencer’s TVC Capital specializes in software deals, but he’s focused on a specialized niche—small software companies with a mature, but under-valued business. JMI Equity, which ranks as San Diego’s biggest private equity fund (JMI raised $875 million for its seventh fund last November), has a similar narrow focus on even later-stage companies, often making substantial investments in well-established software companies with strong prospects for global expansion.
So it should come as no surprise that the young entrepreneurs who have started Web 2.0 and mobile app companies in San Diego have been operating mostly outside the region’s innovation establishment. They don’t see much point in talking with local VCs who have no more money to invest. And they have little interest in attending the dozens of innovation-oriented events that nonprofit groups like Connect, CommNexus, and the San Diego Venture Group hold each month. They don’t think the topics or speakers relate much to what they’re trying to accomplish—and even if they did, they’re not going to pay $50 to attend. Generally speaking, they say they just don’t get much out of networking with the folks who attend such events, including San Diego’s older generation of enterprise software executives.
It was this situation that prompted Spencer to arrange a call with the Foundry Group’s Mendelson. As we recounted our discussion with him, Mendelson said it sounded much like the software scene in Boulder when he moved to the Colorado college town five and a half years ago. With a population of only about 100,000, Mendelson said Boulder now ranks, “at worst, as the fourth-largest in terms of new company formations and companies getting funded.”
He talked about the factors that helped lift Boulder’s software sector out of the doldrums, beginning with the key role the University of Colorado has played in fostering a startup community, a common theme in most tech clusters. UC San Diego has served a similar role here through programs offered by the Jacobs School of Engineering, the medical school, and the Rady School of Management.
People tend to over-rate the importance of homegrown VC firms, Mendelson said. He estimated that 70 to 80 percent of the venture capital flowing into Boulder these days has been coming from firms outside the city. Likewise, Foundry Group does not restrict its hunting grounds to Boulder or even the Rocky Mountains. Like most VCs these days, Mendelson says Foundry is making investments throughout the United States.
So what’s the missing ingredient?
“Do you have somebody there who is willing to do something like TechStars?” Mendelson asked. “You need somebody to be a promoter, somebody willing to work 24/7, to live and breathe this stuff.”
Mendelson said David Cohen has done that as the CEO of TechStars, the business accelerator that was founded in 2006. Since then, the mentorship-driven, seed-stage investment fund has expanded to Seattle, Boston, and New York City. But Mendelson said he doesn’t see TechStars expanding infinitely, as the program places a high priority on recruiting “superstar” mentors in each city.
Spencer, who has volunteered in the past to mentor startups here, says San Diego suffers from a lack of such true mentoring. What he saw, Spencer said, were a lot of other mentors who “either had an agenda or were out-of-work CEOs looking for their next job.”
Boulder also has benefited enormously from the energetic efforts of CU’s faculty, Mendelson said. In particular, he cited J. Brad Bernthal, an associate clinical professor of law who leads the Silicon Flatirons Entrepreneurship initiative, which is a cross-campus platform that ties itself into the community as well. Some of the programs that Bernthal spearheads include an entrepreneurial law clinic that gives free legal services to startups, crash courses that have industry experts teach the community and students relevant topics for startups, discussion roundtables, and “entrepreneurs unplugged,” where well-known entrepreneurs come to speak regarding their life experiences. All the events are free.
Interestingly, a former adjunct assistant professor in electrical engineering at CU, Tom Lookabaugh, was a leading player in this Rocky Mountain hubbub of activity until he recently relocated to San Diego as the chief technology officer for Entropic Communications (NASDAQ: ENTR).
It’s also possible that the many local organizations that provide entrepreneurship mentoring are contributing to the fragmented nature of tech startups in San Diego. In addition to Connect, which is a kind of umbrella group for entrepreneurship and innovation, the telecom group CommNexus offers events and startup mentoring through its free tech incubator, called EvoNexus. The San Diego Software Industry Council, MIT Enterprise Forum and San Diego Venture Group also offer events and services, along with a few private programs like the Founder Institute and Startup Circle.
In this respect, it might be a mistake for TechStars to join in San Diego’s cacophony of well-intentioned voices for innovation—even if it could expand here. But the right kind of leader could help San Diego’s tech community coalesce around some common goals, Mendelson said. It might be necessary, however, to get all the different stakeholders in one room to talk specifically about the most efficient ways to broaden and energize software and IT innovation in the region.
“I think it’s possible to come up with an executable game plan,” Mendelson said. “And we want to share everything we know with other cities.”
So what’s the next step? It probably begins with getting all the different stakeholders in one room. I’ve asked Mendelson if he’d consider making the trip.