Venture capitalists and venture-backed CEOs are feeling more optimistic about 2011, according to the fifth annual outlook survey being released today by the National Venture Capital Association and Dow Jones VentureSource. The most recent “Venture View” survey is based on responses from more than 330 VCs and 180 executives that were collected nationwide at the beginning of December.

With investors returning to the public markets (the Standard & Poor’s 500 stock index is up 11 percent this year, and more than 80 percent since March 2009), two-thirds of the VCs say they expect to see more venture-backed companies going public in 2011. Venture capitalists also predict that venture firms also will invest more capital in the coming year—which is a good thing, since more than two-thirds of the CEOs say they plan to pursue additional funding in 2011.

Venture-backed chief executives say they expect to hire more, sell more, and (of course) get paid more in 2011.

The survey suggests that VCs are gaining confidence in the improvement of their industry, and in the recovery of the U.S. economy in general.

At this time last year, the survey showed that venture capitalists were only cautiously optimistic. “The market was so troubled in 2009, the sentiment was that things had to get better in 2010,” says NVCA President Mark Heesen in a statement. “The improving exit market and a renewed excitement in the IT sector have engendered a confidence among VCs and the CEOs of the companies in which we invest that promises to propel the startup community forward in 2011.”

VCs were less confident, though, about their own prospects for fund-raising—which poses a concern for the industry’s well-being. When asked “How will U.S. venture capital fund-raising fare in 2011?” 38 percent of the VCs said they expect fund-raising to increase, while 32 percent expect it to decrease, and 30 percent anticipate that fund-raising will remain unchanged. Nearly half (48 percent) said they expect to see more … Next Page »

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The Connect Innovation Report that was released last week shows that San Diego’s innovation economy is a mix of contrary signals. We also saw a number of tech sector deals, and we’ve got it all wrapped up for you here.

—San Diego’s Entropic Communications (NASDAQ: ENTR, which makes semiconductors for home entertainment networks, raised $99.1 million after fees and other costs in a public offering of 10.75 million shares last week. The company filed for the offering on Tuesday, and priced its shares at $9.70 each on Thursday. Underwriters have the option of buying an additional 1.6 million shares. Entropic recently raised its revenue outlook for the third quarter of 2010, as major cable and satellite TV providers expand their rollout of multi-room DVR set-tops that use the company’s chips.

—The VizLab, officially known as the Immersive Visualization Center at San Diego State University, is working to make it easier to incorporate “crowdsourcing” in the Web-based, geographic information system-referenced maps it creates about natural disasters. Eric Frost, an associate professor of geological sciences who co-directs the VizLab, tells me a smartphone app available at the CrisisCommons wiki network enables ordinary folks to send pictures that include the date, time, location, and text information.

—The Connect Innovation Report shows that 64 technology startups were founded in San Diego during the second quarter of 2010, almost a 37 percent decline from the 101 startups formed during the second quarter of 2009. Mergers and Acquisitions were up from the previous quarter, and federal patent filings were up 22 percent over the previous quarter, the most issued in more than two years. But venture capital funding dropped, with the total VC investment of $171 million representing a 33 percent drop from the $257 million that flowed into San Diego during the second quarter of 2009. VC funding was down nearly 70 percent from 2007 pre-recession levels.

—San Diego-based Avalon Ventures has raised $161 million for its ninth venture fund, exceeding its minimum fund-raising goal of $150 million. Avalon is one of the few local VC firms that’s still actively investing in new startups.

—Verve Wireless, which just moved into a new headquarters in Encinitas, CA, has raised $7 million in venture funding led by BlueRun Ventures of Menlo Park, CA. Verve’s technology lets newspapers and other media companies publish their content and serve ads across a variety of mobile devices.

—Leading medical and wireless industry technologists are gathering in San Diego this week for the first annual Wireless Health 2010 conference, which begins Tuesday at the Hilton La Jolla Torrey Pines. Scheduled speakers include Qualcomm founder Irwin Jacobs, Dean Kamen of DEKA Research, Dr. Chris Toumazou of Imperial College London, Dr. Patrick Soon-Shiong of Abraxis Health, and Col. Ron Poropatich of the U.S. Army’s Telemedicine and Technology Research Group.

—Thailand’s Cal-Comp Electronics said it is acquiring Spectragraphics, a San Diego holding company that operates Total Electronics and SMS Technologies, which are both electronics manufacturing service companies. Terms of the deal were not disclosed.

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Avalon Ventures, the San Diego-based venture capital firm founded by Kevin Kinsella, has surpassed its targeted minimum fund-raising goal for its ninth venture fund. After closing on a significant investment in the fund yesterday, Avalon Ventures IX now stands at $161 million, according to Kinsella.

These days, it is practically headline news when a San Diego-based venture firm raises a new fund. While the lights are still on at many local venture firms, the partners must be getting their deliveries from Meals on Wheels, because they’re not getting out much.

Avalon, in contrast, has continued to actively invest in new startups, in both life sciences and technology, after closing its eighth fund at $150 million in early 2008. The firm made about two dozen investments over the past two years.

Avalon’s Kinsella, who was a solo practitioner when he raised his first small fund here in 1983, wanted to attract between $150 million and $200 million for Avalon IX when the firm began raising capital in May. With funding now at $161 million, Kinsella says the firm is well past its minimum target of $150 million—”but we still have another large close to go with a couple of existing LPs in a month or two.”

Avalon focuses on early stage investments, which the firm’s four partners tend to identify and develop on their own. Kinsella and partner Jay Lichter manage the life sciences deals, which include recent investments in Avelas Biosciences, aFraxis, Otonomy, and Zacharon Pharmaceuticals. Partners Steve Tomlin and Rich Levandov, who works in Boston, oversee the firm’s investments in wireless communications and Web media applications, which include Zynga, Chumby Industries, E-Band Communications, Cloudkick, and Nabbr.

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Torrey Pines Investment, a San Diego life sciences investment firm with close ties in Russia, has raised $30 million for a second venture fund that is targeting $150 million.

Nicolay Savchuk, a Russian-born mathematician and Torrey Pines director, was traveling yesterday and said he was not available to comment on the fund-raising effort, which was reported previously by Mergermarket and VentureWire.

In an email to me, though, Savchuk said, “The capital will be used to finance acquisition and development or co-development of [drug] candidates from pharma and biotech companies towards monetization event at the next big value step—usually at the proof of concept in human [trials].”

Savchuk and Jay Lichter, the CEO of San Diego-based aFraxis, outlined how co-development works in a presentation last month to the San Diego Venture Group. Lichter said aFraxis completed pre-clinical testing of a promising compound for treating a form of autism in record time, and at a savings of roughly $4 million, by joining forces with Torrey Pines Investment. Savchuk explained that in exchange for an equity stake in aFraxis, his company financed the pre-clinical testing through a full-service contract research organization it owns near Moscow. The testing validated a neurological target for Fragile X syndrome that was identified in the laboratory of MIT Nobel laureate Susumu Tonegawa.

Savchuk told the venture group audience that his firm likes to identify and invest in potential drug candidate “assets”—and use its R&D capabilities in Russia to produce “data packages” that hopefully validate continued development.

In his email to me, Savchuk explained that Torrey Pines Investment plans to use its funding to continue similar collaborations, which are arranged by Torrey Pines and its affiliate ChemRar High Tech Center of Moscow. Torrey Pines, he said, works “in partnership with original pharma, biotech, or in concert with like-minded investors executing virtual development model similar to Afraxis, Roche / Viriom and other deals we closed in the recent past.”

The ChemRar High Tech Center is part of a bio-medical research cluster in Moscow that was key to Russian Pharma 2020, the government-industry partnership that outlined a way to update Russia’s pharmaceutical industry.

Torrey Pines Investment was formed in 2002. Savchuk has not disclosed how much was raised in the firm’s first fund or how many deals it has done, although he told VentureWire the second fund already is bigger than the firm’s first fund.

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We had an interesting mix of high-tech news last week, as several efforts to raise capital took shape, and famed aviator Charles Lindbergh’s grandson announced an electrifying new incentive prize. Read on to learn what it’s all about.

—Carlsbad, CA-based chipmaker MaxLinear is expected to go public this week. The company, which specializes in designing wireless chips used to receive and process TV and Internet video signals, is expected to raise between $43 million and $50 million. MaxLinear plans to use the capital for general corporate purposes and acquisitions. The company’s shares will trade on the New York Stock Exchange under the ticker symbol MXL.

—Seattle-area resident Erik Lindbergh came to the Torrey Pines Glider Port Friday to announce the creation of the Lindbergh Electric Aircraft Prize, or LEAP, which is intended to help launch the fledgling electric aircraft industry. Four LEAP awards, which have yet to be funded, will be awarded annually at the Experimental Aircraft Association’s annual AirVenture, the air show held each July in Oshkosh, WI.

—San Diego’s EMN8, a maker of self-service kiosk technology, is raising more than $14.4 million in venture funding. EMN8 sells its touch screens for use in fast-food restaurants, theaters, theme parks, and other retailers.

—Ventana Capital founder Tom Gephart wants to rally support for a proposal to win $5 billion (with a ‘b’) in federal economic stimulus funding, which would be invested in startup companies throughout the U.S. Gephart’s plan calls for dividing the billions among a family of 20 venture capital firms, and which would provide $250 million for each firm to invest and manage.

—Tom Cassidy, the retired rear admiral hired to lead a DARPA-funded effort to develop a robotic spy plane in 1987, has retired from the company he helped create—General Atomics Aeronautical Systems of Poway, CA. The company has made more than 380 Predator and Reaper aircraft, according to The San Diego Union-Tribune. Cassidy, 77, will remain as nonexecutive chairman of the company that Neal and Linden Blue created as an affiliate of San Diego’s privately held General Atomics.

—Organizers said there was a record turnout for Roth Capital Partners’ 22nd Annual OC Growth Conference, which was held last week at Laguna Niguel, CA. More than 370 companies and 3,000 investors and analysts attended the event. There were 21 presenting companies from San Diego, including Qualcomm, Overland Storage, DivX, and Maxwell Technologies.

—Fallbrook Technologies spokesman Emile Barrios told me the San Diego cleantech company has partnered with China’s Tri-Star Group to manufacture Fallbrook’s proprietary design for a more energy-efficient continuously variable transmission bicycles and light electric vehicles. Tri-Star will make Fallbrook’s transmission at its plant near Shanghai, China.

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You could say Tom Gephart is “old school” venture capital, which means he started investing in the 1970s when there were no rules. So maybe it shouldn’t seem too surprising when he says he’s working on a proposal to secure $5 billion in federal economic stimulus funding that would be invested in startup companies throughout the U.S. by a network of existing VC firms.

Would you agree that sounds like an idea from someone who is unencumbered by rules?

“Ask him, ‘How big of a bong is he smoking?’” one San Diego venture investor exclaimed, when I called to get his reaction to Gephart’s idea. (My source later asked me not to identify him, saying he feared alienating himself from San Diego’s clubby VC community.)

But Gephart is hardly alone in his thinking. A few weeks ago VentureWire carried the headline “A Year After The Stimulus, Cleantech VCs Still Crave Funding” above a story from San Francisco that underscored the lack of funding of any kind for startups developing green and renewable energy technologies.

Gephart assures me he is serious, and other local VCs are reacting positively to his ideas. Connect CEO Duane Roth tells me that Gephart’s idea is similar to funding he suggests in his own proposal for a distributed partnering model for innovation, which he outlined recently in a post written for the Xconomist Forum.

“Tom’s approach [is] to have the federal government fund VCs,” Roth wrote in an e-mail in response to my query. “I proposed that the private sector fund early stage (pre VC) and that the federal government would match at the same terms and conditions as the private sector.”

Gephart has been a successful VC in the past, according to Roth. After making individual investments during the 1970s in the Los Angeles area, he established Ventana Capital in Orange County. Gephart tells me he tapped institutional investors that were primarily in Sweden, Norway, and other Scandinavian countries to raise capital for five Ventana funds over the ensuing 25 years. Ventana invested in many San Diego high-tech startups, including Cymer, Proxima, and Brooktree, as well as biotechs like Idun Pharmaceuticals, Corvas International, and Roth’s unsuccessful blood-substitute company, Alliance Pharmaceutical.

Ventana set out in 2007 to raise a sixth fund of $200 million, but Gephart says they never closed on that effort. While Ventana’s partners are still managing … Next Page »

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The big news last week came from venture-backed Veoh Networks, which is filing for bankruptcy liquidation. Founder Dmitry Shapiro told me Veoh was the biggest Internet company that San Diego has ever seen (see below).

—San Diego’s Veoh Networks, a video streaming website, was officially launched in 2005. It raised $70 million in venture capital, grew to 23 million unique visitors a month, and was generating about $1 million in advertising revenue every month. But Veoh Networks pulled the plug last week, and founder Dmitry Shapiro told me a copyright infringement lawsuit sounded its death knell (even though it won a summary judgment in the case).

—Connect, the San Diego non-profit that supports local technology and entrepreneurship, has decided to hire a lobbyist and set up an office in Washington DC, at an estimated cost of $400,000.

—Envision Solar, a privately-held solar development firm founded by San Diego architect (and Xconomist) Robert Noble, will soon become a public company following a reverse merger with a dormant public company. Noble told me Envision Solar needs capital to expand its capabilities in developing solar-integrated infrastructure and building systems.

—Wind turbine technologies startup Viryd Technologies, which was spun out last May by San Diego’s Fallbrook Technologies, just raised $5 million from existing angel investors and China’s Ningbo Shentong Auto Decorations.

—There will be lots of wireless news coming out this week from Barcelona, where the GSMA Mobile World Congress began yesterday. Novatel Wireless (NASDAQ: NVTL), for example, last week claimed it had made the first data transmission call using Long Term Evolution (LTE) 4G technology.

—At a time when people spend spend more and more of their lives on the Internet, why does online advertising represent only a fraction of the total amount of advertising? Russ Mann, the CEO of San Diego-based Covario, said the answer could be that the Gen-Xers, who are more comfortable using the Internet, social networking sites, and computers, will have to assume command of corporate marketing departments before we’ll see widespread change.

—San Diego-based Leap Wireless was the subject of fresh merger rumors earlier this month, after The Wall Street Journal reported that Leap has hired investment bankers to advise the company. Now rumors are also circulating about a Leap rival, Dallas-based MetroPCS, after Reuters reported last week that MetroPCS has hired investment banking firms JPMorgan Chase & Co. and Credit Suisse Group AG. Leap and MetroPCS were in a merger deal that fell apart in 2007 after the two low-cost wireless carriers failed to agree on a price.

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San Diego’s life sciences sector had a busy week. Allow me to recap it for you.

—Working with Assay Depot, a San Diego-based online marketplace for CRO services, Bruce found 144 companies in San Diego that provide contract services to life sciences companies, providing a glimpse of what appears to be a thriving new sector. CRO stands for contract research organization.

—Zogenix, a specialty pharmaceutical company that raised $71 million last year, led Xconomy San Diego’s 2009 list of top venture financing deals. Total venture investment in San Diego startups during the fourth quarter increased over the same period in 2008, when the economy was in deep recession.

—The San Diego-based nonprofit formerly known as the Burnham Institute for Medical Research is now the Sanford-Burnham Medical Research Institute, thanks to a $50 million donation pledged by philanthropist T. Denny Sanford.

—I had an interesting chat with Kurt Gustafson, CFO of San Diego-based Halozyme Therapeutics (NASDAQ: HALO), which is developing a portfolio of products around its recombinant enzyme hyaluronidase. Separately, Roche announced plans to manufacture a device that would deliver a cancer drug reformulated with Halozyme’s enzyme.

—San Diego Xconomist Duane Roth proposes some ideas to address the funding challenge facing the innovation economy.

—Elevation Pharmaceuticals, a San Diego-based biotech co-founded by serial entrepreneur Cam Garner, raised a tranched $30 million in Series A venture funding.

—Helixis CEO Alex Dickinson told Luke the Carlsbad, CA-based startup plans to market its desktop PCR machines over the Internet. The first orders will ship in April. The technology was spun out of the Caltech laboratories of Nobel laureate David Baltimore and Axel Scherer.

—San Diego-based Somaxon submitted a revised application for its experimental sleeping pill doxepin (Silenor) to the FDA and expects a decision by March 21.

—Amylin Pharmaceuticals (NASDAQ: AMLN) CEO Dan Bradbury told Luke the company is ready and able to launch once-weekly exenatide. An FDA decision on Amylin and Eli Lilly’s application to market the drug is due March 5.

—Prometheus Laboratories, a San Diego-based specialty pharmaceutical and diagnostics company will sell Novartis’ aldesleukin (Proleukin) in the United States. Prometheus is in registration for a $100 million IPO, according to PE Hub.

—Matt Emmens, CEO Cambridge, MA-based Vertex Pharmaceuticals (NASDAQ: VRTX), talked with Luke about his path to the top. The biotechnology company employs 175 in San Diego.

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It’s probably not much consolation for the entrepreneurs who tried to raise venture funding last year, but U.S. venture capital firms raised much less money from their institutional investors in 2009 than they have in recent years.

New figures from Dow Jones LP Source show that fund-raising by venture firms in 2009 fell almost 55 percent compared to 2008, with 120 funds raising slightly more than $13 billion nationwide. In 2008, 204 VC firms raised a total of $28.7 billion from pension funds, university endowments, insurance companies, wealthy individuals, and other investors. It hasn’t been that slow for VCs since 2003, according to Dow Jones.

The drop in VC fund-raising reflected a broader decline across the U.S. private equity spectrum, with buyout firms, funds-of-funds, and mezzanine firms all showing precipitous drops last year. Altogether, Dow Jones says 331 U.S. funds raised a total of $95.8 billion in 2009—down a staggering 68 percent from the $299.9 billion that 508 funds raised in 2008.

It was the first time in six years that private equity firms raised less than $100 billion. Bear in mind, though, that fund-raising by venture firms in 2008 was approaching a record pace until the fourth quarter, when the collapse of Lehman Brothers precipitated a plunge in PE fund-raising.

The only category showing an increase in fund-raising was the secondary firms that specialize in paying bargain-basement prices to take over the companies that conventional VCs are forced to throw overboard. Here’s a breakdown of fund-raising by firms in Xconomy’s cities, as well as nationwide totals for each of the five PE fund categories:

—The Boston region showed the strongest activity by far, with 34 PE funds raising almost $10.4 billion in 2009, according to the Dow Jones figures. More than … Next Page »

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In news that’s not exactly unexpected, a mid-year survey shows that fundraising among U.S. venture capital firms is near low ebb, with the total raised so far at the lowest point since 2003, when 34 VC funds raised $2.2 billion in the first half of the year.

The survey released today by Dow Jones Private Equity Analyst shows shows 51 venture firms raised $5.1 billion nationwide during the first six months of 2009—down almost two thirds from last year, when 115 VC firms raised $13.6 billion.

The survey found similar results for fundraising by all types of private equity funds, not just venture capital, with 173 PE funds raising $54.9 billion during the first six months of 2009. That was 64 percent less than the $152.7 billion raised by 261 funds during the first half of 2008.

In a statement, Jennifer Rossa, the managing editor of Dow Jones Private Equity Analyst, said, “Right now, most venture firms are more concerned about conserving cash and helping portfolio companies survive than raising a new fund.”

The largest venture capital fund raised so far belongs to New Enterprise Associates of Baltimore, MD, which got $907 million for its eighth venture fund. The firm has said it intends to raise $2.5 billion for the fund, known as New Enterprise Associates XIII.

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Fund-raising by private equity firms slowed dramatically during the last three months of 2008, so much so, in fact, that an analysis shows an 18 percent overall decline among fund-raising by U.S. firms compared to 2007—all of it due to the Q4 meltdown.

An analysis published today in the Dow Jones Private Equity Analyst newsletter found that 99 funds raised about $43 billion during the fourth quarter, a roughly 57 percent decline from the nearly $100 billion raised by 208 funds during the same period in 2007.

Fund-raising by private equity firms in 2008 had been running at a pace slightly ahead of the industry record set in 2007 until the fourth quarter—when fund-raising by private equity firms slowed to a virtual standstill. Based on statistics from the LP Source database, the analysis found that 363 U.S.-based private equity funds raised $265.6 billion in 2008—18 percent below the $325.8 billion raised by 506 funds in 2007. The analysis focused on private capital invested with venture capital firms, buyout and corporate finance funds, mezzanine funds, and secondary funds, also known as funds of funds. No hedge funds were included.

“While 2008 was still easily the second-best year on record, the decline we saw in the most recent quarter may steepen in the coming months,” newsletter managing editor Jennifer Rossa said in a statement. The economic crisis triggered by the Lehman Brothers bankruptcy in early September hit the buyout industry particularly hard, as fund-raising declined 26 percent to $181 billion raised among 143 buyout funds—a level comparable to 2006. At the nine-month mark, the buyout sector was down just 3 percent compared to 2007.

Overall venture capital fund-raising, which was up about 4 percent at the nine-month mark, fell by 25 percent for the year in 2008, with $24.7 billion raised across 150 funds nationwide. It was the lowest fund-raising total for the venture industry since 2004.

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Last week I wrote a story about Highland Capital Partners’ all-out 20th anniversary bash here in Boston entitled, What Financial Crisis? The same title might be fitting for a piece about the data on private equity fundraising that was released today. Buoyed by a strong third quarter, private equity firms—including venture firms like Highland—are on pace to eclipse last year’s record of $313 billion raised.

Something tells me, especially after yesterday’s global market meltdown, they won’t break that mark. But still, the numbers presented by the Dow Jones Private Equity Analyst newsletter (which were culled from the LP Source database) are pretty interesting. All told, the newsletter reports, U.S. fundraising is up 11 percent so far this year, with $222.6 billion raised by 264 funds in the first three quarters, compared to $200.4 billion raised by 298 funds at the same time last year. At the year’s mid point, the 2008 numbers had lagged 2007 by a slight amount.

Looking closer, though, the picture was more mixed, and more reflective of the current climate than the total figures might seem. Virtually all the gain came in two areas: distressed funds and mezzanine funds. The former (which is part of the Buyout/Corporate Finance category below and consists of funds that specialize in buying troubled companies), saw $38 billion raised by 18 funds, up 28 percent from the $29.5 billion raised by 16 funds at this point in 2007, according to Dow Jones Private Equity Analyst figures. Oaktree Capital Management, based in Los Angeles, set a record for the largest single distressed fund when it raised $10.6 billion earlier this year for its OCM Opportunities Fund VII LP, the newsletter reported.

Mezzanine funds took in $37 billion, compared to a mere $3 billion through the third quarter of 2007. More than half of that—$20 billion (of which roughly a third was in the form of leverage)—was in the GS Mezzanine Partners V LP fund raised by Goldman Sachs Group. Again, this makes sense in today’s climate, because with the turmoil in credit markets, there’s a bigger need for mezzanine funds, which can step in to provide financing without forcing firms to give up huge chunks of equity, according to Dow Jones spokesman Adam Wade. “It kind of fills a gap in the credit markets a little bit,” Wade says.

Venture capital fundraising was up ever so slightly, with $19.7 billion raised by 107 funds, compared to $19.1 billion taken in by 103 funds in the same period last year.

“Limited partners have been saying that they intend to invest in private equity at a steady pace through the current downturn,” said Jennifer Rossa, managing editor of Dow Jones Private Equity Analyst in a statement. “Many of these investors have learned their lesson after the venture bubble burst in 2000. Back then, many LPs stopped investing in private equity, only to miss out on some of the best vintage years the industry has yet produced. This time around, they continue to invest, but they’re being very careful about which strategies they invest in.”

My own take, after talking to people at various gatherings the last few weeks, is that Rossa is being overly optimistic. LPs might have intended to invest at a steady pace throughout the downturn—but that was likely before they realized how bad the downturn could be.

In any case, here is the table:

U.S. Private Equity Fundraising, YTD

Source: Dow Jones LP Source

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