The Fourth Quarter Collapse: VC Funding Down Sharply in San Diego

Xconomy San Diego — 

The early returns on venture capital investments that came in over the weekend from Dow Jones VentureSource pretty much confirmed what we’ve been hearing. VC firms are battening down the hatches to weather the economic downturn.

The nationwide survey showed venture funding in new companies declined by 30 percent during the last three months of 2008, with $5.5 billion going into 554 deals. That compares with $7.9 billion in 718 deals during the same quarter in 2007. The drop in the fourth quarter accounted for most, if not all, of the overall 8 percent decline for the full year, with $28.8 billion invested in 2,550 deals nationwide throughout 2008.

In the San Diego region, the survey showed VC investments plunged by 57 percent during the last three months of 2008. Funding for life sciences startups went into a freefall, dropping by 84 percent, which seemed to account for much of the overall downturn in the region. For example, VC funding for IT deals during the fourth quarter actually increased from almost $91.7 million in 2007 to $105.9 million in 2008.

Dow Jones VentureSource says $182.5 million went into 14 deals during the fourth quarter in San Diego. That compares with almost $425.6 million invested in 25 deals during the same quarter last year. In the healthcare category, the Dow Jones survey counted just $51.2 million in five San Diego deals in the fourth quarter; and $325.9 million in 11 deals during the same quarter in 2007.

The venture firms that specialize in life science deals are mindful about keeping more money in reserve, says Kevin Kinsella, founder of San Diego’s Avalon Ventures. “Because I can’t rely on my confreres to come in on my B round deals,” Kinsella says, it may be necessary to act as the “sole provider” for some startups during those years. “So that time is getting stretched out and that means fewer deals get done.”

Doug Obenshain, an Ernst & Young partner in San Diego who advises technology startups, says overall VC investing in the area last year, (87 deals for $1.14 billion) was roughly comparable to the average (97 deals and $1.14) billion for the years 2002 through 2006. He also noted VC investments were diversified across cleantech, communications, Internet, and life sciences startups. Still, Obenshain concedes, “The financial crisis in the fourth quarter has impacted nearly everyone, and it had an impact on venture financing as well.”

According to the survey released by Dow Jones VentureSource, the five biggest venture investments in the region during the fourth quarter were:

—Luxtera, a Carlsbad communications and networking equipment company, got $26.7 million in a later stage round that was dated Dec. 31, with funding provided by Advanced Equities Financial, August Capital, New Enterprise Associates, and Sevin Rosen Funds.

—Fallbrook Technologies, a San Diego automotive equipment startup, got $25.4 million in December in a first round led by NGEN Partners and Robeco Cleantech private equity.

—Anaphore, a San Diego biopharmaceutical, got $25 million in a first round led by 5AM Ventures, Versant Ventures, and Apposite Capital. (Anaphore reported the deal on Jan. 7, but Dow Jones VentureSource dated it Dec. 31.)

—Awarepoint, a San Diego wireless communications company, got $13.3 million in November in a later stage deal led by Avalon Ventures, Cardinal Partners, individual investors, undisclosed investors, and Venrock.

—Eventful, a San Diego software company operating a search portal, got $10 million in October from Bay Partners, Draper Fisher Jurvetson, and Telefonica Capital.