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San Diego Report on Innovation Economy Still Shows Mixed Picture of Economic Recovery

Xconomy San Diego — 

The Connect Innovation Report is not exactly timely—the report on San Diego’s innovation economy for the second quarter that ended June 30th was released just yesterday. But the almost 40-page report offers a more comprehensive overview than the more immediate picture we get from venture capital investments in San Diego startups during the quarter.

The report also includes data on such economic indicators as the number of technology companies started (down more than a third from Q2 of 2009); M&A deals (roughly twice the deals of Q2 2009); and granted patents (up 22 percent). What’s more, it incorporates analysis from San Diego economist Kelly Cunningham of the National University System Institute for Policy Research.

The entire Connect Innovation Report can be found online here. My roundup of the highlights follows, but many of the local economic indicators remain at odds. Mergers & acquisitions activity during the quarter was encouraging, but we saw more deals with a bigger overall valuation during the first quarter of 2010. While federal funding for research has been soaring—especially in the health sciences—anemic venture capital investing continues to sap the life from San Diego’s innovation community. With so many contrary indicators, just about any mechanic would conclude that this economic engine still needs a tune-up.

—The Innovation Report shows 64 technology startups were founded in San Diego during the second quarter of 2010. This was an 83 percent increase from the first quarter, but a nearly 37 percent decline from the 101 startups formed during the second quarter of 2009.

—The report shows there were 40 mergers & acquisitions deals for a total reported value of $317 million in San Diego during the second quarter—approximately twice the 24 deals with a total reported value of $139 million during the same quarter in 2009. The total value was down by about 62 percent, though, from the first quarter of this year, when San Diego saw 46 M&A deals valued at $845 million. In addition, 10 San Diego companies closed Private Investment in Public Equities (PIPE) deals for more than $100 million. Two San Diego companies also went public through initial public offerings (IPOs) valued at $237.6 million.

—Researchers found that 1,094 federal patents were granted to San Diego researchers and inventors during the second quarter—a 22 percent gain over the 898 patents that were issued during the preceding quarter and the most patents granted in the past two years. Data for the same quarter last year was not included, but the Innovation Report says San Diego accounted for 17 percent of the patent applications published in California during the quarter and 12 percent of the patents granted.

—Venture capital funding of San Diego continues to drop, 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. Venture capital funding went to 24 companies during Q2 of this year and 26 companies in Q2 of 2009. The report also notes that VC funding in San Diego was down nearly 70 percent from 2007 pre-recession levels, and had dropped 24 percent compared to the first quarter of 2010, when $226 million went to 31 companies.

—The Innovation Report also lists the top 10 local startups that received venture capital funding during the quarter, courtesy of the MoneyTree Report from PricewaterhouseCoopers. We saw most of the deals on this list previously, with the exception of Tandem Diabetes, which the MoneyTree report had included in its list for the first quarter of 2010: 1) Sonexa Therapeutics, $37.2 million; 2) Astute Medical, $26.6 million; 3) Nereus Pharmaceuticals, $20 million; 4) Zeebo, $13.5 million; 5) Aragon Pharmaceuticals, $12. Million; 6) Otonomy, $10.6 million; 7) Imagine Communications, $10 million; 8) Pervasive, $6 million; 9) Evoke Pharma, $6 million; 10) AltheaDx, $6 million.

—Overall technology employment in San Diego County has decreased about 3 percent over the past two years, while San Diego’s overall employment has fallen by 7.6 percent over the same period. New data from the National University System Institute for Policy Research shows that San Diego’s tech sector represents only 6 percent of employers, and just over 11 percent of all jobs in the county. But tech employment also accounts for more than 25 percent of all wages—paying 90 percent more than the overall average industrial wage in San Diego County. The report estimates that 136,500 people were employed in San Diego’s tech sector during the second quarter, and new methodology developed by the institute estimates that number amounts to more than 12 percent of all tech jobs in California. In comparison, Santa Clara County has more than 200,000 tech jobs and Orange County has nearly 122,000.

—The value of federal grants awarded to research scientists in San Diego from the National Institutes of Health, National Science Foundation, National Aeronautics and Space Administration, and the National Oceanic and Atmospheric Administration totaled $383 million during the second quarter. That was a 35 percent increase over the $286 million in the first quarter, but the report did not provide a comparison to the second quarter of 2009. The $340 million in total NIH grants awarded during the quarter was the largest quarterly award total in over two years, according to the Connect Innovation Report.

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