A Snapshot of San Diego’s Innovation Economy

Xconomy San Diego — 

San Diego’s spirit of entrepreneurship remained resilient in 2008, despite a credit crisis that precipitated one of the worst financial periods in U.S. history, according to Connect, a San Diego nonprofit group that promotes technology innovation and entrepreneurship.

Connect says 73 new technology companies were started in the San Diego area during the last three months of 2008. That’s a 58 percent drop from the 149 startups that Connect counted in the last three months of 2007, and a 29 percent decline from the preceding quarter. But as Connect noted in a report issued today, it’s still significant considering the nationwide financial turmoil that worsened dramatically in September.

Of the 73 new startups in the region, 23 are software developers, 22 are life sciences companies, and 13 specialize in communications technologies.

Connect prepares a report on San Diego’s innovation economy each quarter in partnership with the National University System Institute for Policy Research, UC San Diego Extension, PricewaterhouseCoopers and the Procopio law firm. Among other findings in the report:

—San Diego technology companies submitted 1,376 patent applications during the quarter, a 10 percent rise compared to the fourth quarter of 2007.

—Data from PricewaterhouseCoopers shows venture capital firms invested $205 million in 24 local technology startups during the quarter, a 58 percent decline from the same quarter last year. That’s comparable to what we reported in January.

—A total of 299 technology startups were created throughout the year in 2008, an 18 percent decline from 2007, when 367 new innovative companies were launched.

While new company formation has declined, periods of economic decline often spur even more innovation, according to a statement included in the report from Kelly Cunningham, Economist and Senior Fellow at the National University System Institute for Policy Research.

“Despite these challenging times, new business creation may actually gain momentum in months ahead as more workers become unemployed,” Cunningham says. “Established firms tend to cut back on their own growth investments during a downturn and abandon promising growth opportunities too fast, focusing instead on defending their own established core activities.”

The San Diego startup community hasn’t been immune from to the effects of the financial crisis. Ask Poway-based ISE Corp. about the difficulties of securing financing in the midst of a crisis. In an anecdote recounted in the report by Dave Morash, ISE’s chief financial officer, the maker of hybrid-electric systems for buses and trucks had $25 million in financing arranged on a Friday in September. Merrill Lynch had agreed to contribute $7.5 million, but after Bank of America acquired Merrill that weekend, ISE ended up with $17.5 million instead.

Despite the bad economic news, recessions may actually spur risk-taking and innovation. Microsoft Corp. and Hewlett-Packard Co. were famously started during recessions. As Austrian economist Joseph Schumpeter put it, a recession acts as a good, cold shower for an economy, releasing capital from unproductive enterprises.

[Xconomy’s Seth Hettena contributed to this report]